Why CenturyLink's Price Is Floundering

January 25, 2019

 

There are two views on CenturyLink’s (CTL) revenue and FCF (free cash flow).

 

Bull case: An inflection point on revenue will occur over the next few quarters, i.e., accelerating losses start to reverse. This will ensure long term FCF and EBITDA growth to cover the dividend and put the leverage ratio on a sustained downward trend.

 

Bear case: FCF will grow modestly over the short term but revenue will continue south for the long term. Eventually this will produce an inflection point for FCF. FCF will start to trend down at some point making the dividend unsustainable. The dividend will be cut or eliminated. The long hoped for inflection point for revenue not in sight. I heard a term the other day that CTL’s revenue is like a melting ice cube which would fit the bear case.

What we know is FCF will improve in the short term due to cost cutting, synergies and the culling of unprofitable revenue, however it’s not about the short-term health of the company but the long-term health and the question always comes back to revenue. I see revenue visibility as three pillars at this point.

 

1. Unprofitable revenue that CTL plans to exit

2. Legacy revenue declines

3. Growth in profitable revenue.

 

The company should know the amount of revenue they plan to exit as we are well into integration. Legacy declines have been occurring for some time so it’s the easiest of the three to project. Where visibility is lacking and driving price declines is number 3. Why?

 

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