Why CenturyLink Could Head Even Higher

Shares of CenturyLink (NYSE: CTL  ) hit a 52-week high on Tuesday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
Consolidation has been the name of the game for voice, cable, and Internet providers over the past few years. Perhaps no company has embraced this ethos more than CenturyLink.

CenturyLink has made three very sizable acquisitions in just the past three years, which has set the company up for significant cost savings, expanded its geographic coverage, and reduced the burn rate of landline phone cancellations. Combined, the Embarq acquisition in 2009 and the Qwest and SAVVIS purchases in 2011 are expected to generate net synergy costs in excess of $1 billion when fully integrated (note: the Embarq integration is complete). In addition, the SAVVIS acquisition gives CenturyLink a presence in enterprise cloud computing, an area where CenturyLink essentially had no presence before, but is currently growing like wildfire.

In CenturyLink's most recent quarterly results we can see the fruits of these acquisitions beginning to pay off. In high-margin services CenturyLink added 89,000 high-speed Internet customers and increased its Prism TV subscribership by 20%. The company is also on pace to produce $3.2 billion-$3.4 billion in free cash flow.

The primary concerns for CenturyLink, and other large telecom providers, are the continuing exodus of landline customers, low brand loyalty, and poor company image. Frontier Communications (NYSE: FTR  ) had dealt with a steady customer exodus since announcing plans to purchase primarily rural landline assets from Verizon (NYSE: VZ  ) in 14 states in 2009. On the image front, few companies are regular guests to the list of America's most hated companies than Comcast (Nasdaq: CMCSA  ) .

How it stacks up
Let's see how CenturyLink stacks up next to its peers:

CTL Chart

CTL data by YCharts

Comcast has turned in the best five-year performance, with big U.S. players AT&T (NYSE: T  ) and Verizon lagging, and Frontier bringing up the caboose.

Company

Price/Book

Price/Cash Flow

Forward P/E

Dividend Yield

CenturyLink 1.3 5.1 18.9 6.9%
Frontier Communications 0.9 2.7 12.7 14.7%
Verizon 3.6 4.3 15.4 4.4%
Comcast 1.9 5.9 14.4 1.7%
AT&T 2 6.2 10.2 4.9%

Source: Morningstar.

With cash flow stability, solid dividends, and some degree of imperviousness to economic downturns, all five companies offer shareholders uniquely good values. Yet each company also offers its own set of concerns.

For Frontier and CenturyLink the concerns are one and the same -- integration costs and landline shrinkage. Both companies are fighting an uphill battle to grow through acquisitions while also minimizing customer attrition. At least in CenturyLink's case, its dividend has rocketed higher and appears sustainable while Frontier's quarterly stipend has fallen twice in the past two years.

For Verizon and AT&T the concern is where they'll find growth. Being the biggest has its perks (predictable cash flow and premier pricing power), but oversaturating markets is always a concern. Also, both companies have been rallying significantly in recent months, bringing up concerns about them possibly being overvalued.

For Comcast, and any other cable company for that matter, it's how to rid itself of the stigma of America's most hated companies. With a relatively small yield, it'll need to add a lot of high-margin XFinity customers if it hopes to keep investors happy.

What's next
Now for the $64,000 question: What's next for CenturyLink? That depends entirely on how quickly it's able to integrate all of its new acquisitions, how successful it is at expanding its high-margin data service packages, and whether it can maintain that delectable 7% dividend yield.

Our very own CAPS community gives the company a four-star rating (out of five), with 92.2% of members who've rated it expecting it to outperform. Count me among the optimists as I too have made a CAPScall of outperform on CenturyLink and am currently up 13 points on that call.

The main attraction of CenturyLink is its 7% yield -- admittedly, that's what attracted me in the first place -- but it's actually the company's newly acquired businesses that could spur a period of rapid enterprise growth. As long as CenturyLink remains consistent with its cash flow expectations and landline attrition keeps slowing, there's really no reason to think this won't head even higher.

If dividends are your thing, then you're bound to find value in the latest free special report from our team of analysts at Motley Fool Stock Advisor that highlights nine dividend companies that can help secure your financial future. You've been privy to one in our discussion here: AT&T. Click here to find out the identity of the remaining eight.

Craving more input on CenturyLink? Start by adding it to your free and personalized watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1948783, ~/Articles/ArticleHandler.aspx, 8/30/2014 10:41:16 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement