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Bear of the Day: CenturyLink (CTL)

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As new competition and changing consumer trends continue to mess with the status quo, the telecommunications industry has been forced to adapt. Investment and consolidation are high, and shifting business models are aplenty. Unfortunately, some legacy names—such as CenturyLink, Inc. —have struggled to compete.

CenturyLink operates as a local phone carrier and internet service provider throughout the United States. The company’s services are currently available in 22 states. In November, CenturyLink completed its merger with Level 3 Communications, underscoring its attempt to focus on business customers.

CenturyLink has attempted to shift with the times, but its success has been limited. Management has now missed earnings estimates in four consecutive quarters, and the stock is down about 40% on the year. CenturyLink is currently sporting a Zacks Rank #5 (Strong Sell).

Latest Earnings Report

CenturyLink reported its third-quarter fiscal 2017 results on Nov. 8. The company posted adjusted earnings of $0.42 per share, missing the Zacks Consensus Estimate of $0.45. Net income for the quarter was $92 million, down from the $152 posted in the year-ago period. Total revenues of $4.034 billion were down about 8% year-over-year and below our consensus estimate of $4.061 billion.

CenturyLink faced challenges in all of its revenue streams. Strategic revenues were down about 7%, while Legacy revenues slipped 10%. Its Other Services revenues were flat on the year, while Data Integration revenues plummeted 18%—making this the company’s worst performing unit.

Unfortunately, the company’s financial positioned has simply worsened. Operating margin in the quarter was 12.1%, down from 13.5% in the prior-year quarter. Adjusted free cash flow in the quarter was $109 million, down from $186 million last year. The company now has just $160 million in cash and cash equivalents, and its debt pile has grown to nearly $25 billion.

Total access lines at the end of the quarter were down 6.5%, while high-speed broadband customer count slipped about 3.1% year-over-year.

What’s worse, Enterprise segment revenues were down 11.2% in the quarter. CenturyLink intends for the Level 3 acquisition to help it establish dominance in the enterprise telecom field, but it is already starting from a weak position on that end.

Estimate Revisions and Key Stats

As we can see, CenturyLink’s sluggish quarter has inspired a slew of negative earnings estimate revisions. The big thing to note here is that we are seeing 100% agreement among analysts making revisions. With the Level 3 merger, the upcoming fiscal year was supposed to be a turning point for CenturyLink, but the latest estimates imply that the company could continue to struggle.

On top of this, CenturyLink is sporting “D” grades in our Growth and Momentum Style Score categories. Slumping earnings, revenue, and cash flow should scare off growth investors, while a complete collapse in share price movement will force momentum investors away.

Other Options

For those looking to make a telecom play right now, it is probably best to look elsewhere. However, CenturyLink’s “Wireless National” industry has lost an average of 7.24% this year, and it is currently sitting in the bottom 11% of the Zacks Industry Rank. Nevertheless, industry giants like AT&T (T) and Verizon (VZ), both currently sporting a Zacks Rank #3 (Hold), look like better options right now.

Want more stock market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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