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CenturyLink (CTL) Down 5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for CenturyLink (CTL). Shares have lost about 5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is CenturyLink due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

CenturyLink Q3 Earnings Miss, Revenues Beat Estimates

CenturyLink reported mixed third-quarter 2019 financial results, wherein the top line surpassed the Zacks Consensus Estimate but the bottom line missed the same.

Net Income

Net income for the September quarter was $302 million or 28 cents per share compared with $272 million or 25 cents per share in the year-ago quarter. The improvement was primarily due to higher operating income and lower interest expense.

Net income (excluding the aggregate effects of integration and transformation costs, and special items of $26 million and $55 million, respectively) came in at $328 million or 31 cents per share compared with $327 million or 30 cents per share in the prior-year quarter. The bottom line, however, missed the Zacks Consensus Estimate by a penny.

Revenues

Quarterly consolidated operating revenues declined 3.6% year over year to $5,606 million primarily due to lower revenues at Consumer segment. This compares to declines of 5.5% in the second quarter and 5% in the first quarter of 2019. The company witnessed a substantial increase in Universal Service Fund rates in the reported quarter. The top line, however, surpassed the consensus estimate of $5,551 million.

By business unit, Small & Medium business revenues were $734 million compared with $785 million reported in the prior-year quarter mainly due to decline in legacy voice services. Revenues from Wholesale declined 6.6% year over year to $1,025 million, despite recording a $15 million benefit from a carrier settlement. Consumer revenues were $1,398 million compared with $1,539 million in the third quarter of 2018. This, however, reflected a $40 million benefit from a revenue recognition-related adjustment completed during the year-ago quarter.

Despite currency pressures, revenues from International & Global Accounts grew 0.8% year over year to $899 million. Enterprise revenues totaled $1,550 million, up 3%, driven by installs from sales earlier in the year as well as strength in the federal government channel. Overall, the company has progressed toward its objective of growing both International & Global Accounts and Enterprise revenues in the second half of 2019 compared with the first half.

Other Quarterly Details

Total operating expenses reduced 5.4% year over year to $4,656 million attributable to lower cost of services & products, and SG&A expenses. Operating income was $950 million compared with $894 million in the prior-year quarter supported by decline in expenses. Adjusted EBITDA slipped to $2,223 million from $2,228 million. Adjusted EBITDA margin was 39.7% compared with 38.3% a year ago, driven by cost-transformation initiatives.

Capital expenditures were $957 million compared with $684 million in the prior-year quarter. The company continues to invest in expanding its fiber footprint, adding buildings to the network. During the third quarter, it added nearly 4900 new fiber-fed buildings, bringing the year-to-date tally to 14,500.

Cash Flow & Liquidity

During the first nine months of 2019, CenturyLink generated $4,771 million of net cash from operating activities compared with $5,036 million in the year-ago period. For the third quarter, free cash flow (excluding cash integration and transformation costs, and special items) was $983 million compared with $1,163 million in the prior-year quarter. As of Sep 30, 2019, the communications company had $1,404 million in cash and equivalents with $33,381 million of long-term debt.

2019 Guidance Reiterated

CenturyLink has reiterated all of its financial targets for full-year 2019. It continues to expect adjusted EBITDA of $9.00-$9.20 billion. While free cash flow is expected in the range of $3.10-$3.40 billion, free cash flow after dividends is projected between $2.005 billion and $2.305 billion. Capital expenditures are anticipated between $3.50 billion and $3.80 billion, and depreciation and amortization are expected to be $4.75-$4.85 billion. Effective income tax rate is expected to be about 25%.

Outlook

CenturyLink continues to invest in growth and operational efficiency. It is committed to delivering an excellent customer experience while enhancing its product capabilities including fiber network. The company remains focused on execution, particularly on improving revenue trajectory, maximizing profitability and staying disciplined on cost transformation and deleveraging.

Further, CenturyLink remains confident in its ability to meet its deleveraging objectives and reaching the target leverage range of 2.75-3.25x (net debt to adjusted EBITDA) within the next three years backed by healthy business fundamentals. The company intends to return significant value to shareholders while investing in revenue and EBITDA growth drivers.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

Currently, CenturyLink has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

CenturyLink has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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