Here's Why CenturyLink Inc. Can Deliver More Upside

After appreciating 15% this year, CenturyLink can go higher.

Jun 23, 2014 at 6:32PM

Telecommunications provider CenturyLink (NYSE:CTL) is beating the market this year. The company's stock is up close to 15% so far in 2014, trumping the S&P 500's gain of 6.6%. However, CenturyLink's gain isn't as impressive as peers Frontier Communications (NASDAQ:FTR) and Windstream (NASDAQ:WIN), both of which have appreciated more than 20% in 2014. Despite this, CenturyLink's robust strategies indicate that the company should continue doing well going forward. Let's see why.

A string of positives
CenturyLink is witnessing rapid growth in products such as high-speed Internet, high bandwidth data services, Prism TV, and managed hosting services. As a result, its MPLS, Wavelength, and Ethernet services grew at a solid rate in the previous quarter. CenturyLink also added about 66,000 high speed Internet customers and more than 24,000 Prism TV customers during the first quarter.

Looking ahead, CenturyLink is focusing on a number of areas to make its operations more efficient and profitable. It is looking at business networking platforms, cloud and IP services, consumer broadband & video, fiber-to-the-tower, managed hosting, Prism TV expansion, and operating efficiency to drive growth. Essentially, CenturyLink is looking to transform itself from a traditional network communications company to an integrated provider of IP, enhanced network, cloud hosting and IT services.

It is providing customers and end users with integrated communications and IT solutions. Such a move will help CenturyLink achieve deeper market penetration as more customers are buying integrated services bundles instead of single services.

CenturyLink is focusing on enriching the customer experience by providing reliable and secure connectivity solutions. These should assist the growing bandwidth needs of businesses and wireless carrier customers. The company expects these services to deliver strong growth in the future. To achieve this goal, CenturyLink is making strategic investments in its marketing and sales team to aggressively promote these services. 

The company should benefit from a targeted marketing approach, various sales programs, and the continued investment in its broad range of products and services. For example, the company recently launched Managed Office. This package provides integrated network solutions, VoIP, email, and other key business applications. The company has witnessed strong early sales for this product, indicating its strong product development.

Additionally, the company is expanding its gigabit-capable passive optical networks, or GPON, and fiber deployments to commercial buildings. GPON offers fast Ethernet-quality speeds, allowing customers to enable their business with enhanced cloud facilities. CenturyLink is also deploying fiber for wireless towers, which should help it tap demand from wireless carriers for data backhaul.

Data center focus
Apart from this, CenturyLink is expanding its data center capacity and is undertaking various pricing initiatives to gain market share in the cloud. It had acquired Savvis, a provider of global cloud infrastructure and hosted IT solutions, to strengthen its offerings in the cloud. This acquisition has enhanced CenturyLink's managed hosting service that it provides to enterprises. As a result, it registered 13% growth in managed hosting in the previous quarter, and expects the growth to continue in the high teens. 

CenturyLink will be deploying its advanced cloud node to six of its data centers by the end of the year, beefing up its current tally of nine Tier 3 cloud nodes. This deployment will help the company maintain its competitiveness, as Tier 3 cloud nodes will increase operating efficiency and enhance IT and cloud enablement services.

The competitive landscape
CenturyLink's moves are important for the company as the telecom industry is highly competitive, and rivals such as Windstream and Frontier are trying to increase their presence.

Frontier, for example, made a smart move by acquiring the Connecticut operations of AT&T in December last year. The acquisition brought 415,000 data, 900,000 voice, and 180,000 video residential connections into Frontier's fold.  In addition, Frontier added a record 112,250 net broadband additions in 2013, while also reporting a 61% year-over-year jump in residential customer retention. This shows that Frontier's strategies are working well as the company is recording terrific growth in the customer base.

Meanwhile, CenturyLink will face stiff competition from Windstream in the data center space. Windstream is deploying data centers in order to enhance its cloud-based services, and it also expects to add 75,000 broadband customers this year. Windstream is making investments to increase its penetration in the rural market. It is focusing on fiber-to-the-X networks, or FTTX, and fiber-to-the-tower to enhance broadband coverage and surfing speed. 

The bottom line
CenturyLink's focus on new products and services, along with strong customer additions, are positive factors. In addition, the company is making its services more efficient, which should result in strong customer retention going forward. CenturyLink also carries a solid dividend yield of 5.80%. All of these factors make the company a good investment.

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Sharda Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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