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 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.
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.
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.
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