Please ensure Javascript is enabled for purposes of website accessibility

Is CenturyLink Stock a Buy Near 52-Week Lows?

By Steve Symington - Apr 5, 2017 at 1:52PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Why shares of the telecommunications giant might be a bargain right now.

Shares of CenturyLink (LUMN 2.92%) have fallen nearly 25% over the past year as of this writing, and trade within spitting distance of 52-week lows. Most recently, CenturyLink stock came under pressure amid mixed signals from multiple analysts on Wall Street.

Conflicting opinions

Two weeks ago, for example, Goldman Sachs analyst Brett Feldman reiterated his sell rating on CenturyLink stock. Feldman simultaneously reduced his per-share price target to $19 from $21, representing a more than 20% discount from current levels. To justify his more bearish stance, Feldman noted he had reduced his estimates for both earnings and discounted cash flow going forward.

CenturyLink headquarters building


Meanwhile, analysts at JPMorgan expressed a different stance earlier this week, arguing CenturyLink is undervalued relative to its peers and should be poised to outperform. JPMorgan also noted CenturyLink's dividend -- which currently sports an uncomfortably high 9.15% annual yield -- should remain intact.

Indeed, it's hard to blame them for that rationale with shares currently trading at below 12 times this year's expected earnings. And despite CenturyLink's high dividend yield and lofty 186% payout ratio, CenturyLink management has voiced their intent to maintain the company's payout going forward. 

Progress where it counts

But before we get there, perspective is in order. Remember that CenturyLink stock plunged more than 13% over just a few days this past October, when it announced it had agreed to acquire Level 3 Communications (LVLT) in a cash and stock deal valued at roughly $34 billion (including debt CenturyLink will assume). Of course, at that size, this deal is more of a merger of equals given CenturyLink's current enterprise value of just under $33 billion. But it's telling that shares of CenturyLink are currently trading at almost exactly where they stood after that initial decline six months ago. In short, though CenturyLink will continue to release quarterly earnings reports between now and the close of the acquisition, the market recognizes that CenturyLink's future is tied to the completion and subsequent integration of that enormous acquisition. 

Incidentally, CenturyLink stock enjoyed a modest rebound from its lows over the past few days after shareholders of both companies overwhelmingly approved the merger last week, with 96.3% and 98.8% in favor at CenturyLink and Level 3, respectively. The companies have also secured approvals and clearances for the merger in Ohio, Utah, Nevada, Georgia, West Virginia, Connecticut, Indiana, and Louisiana, and expect to receive the remaining state, federal, and international approvals in time to complete the deal by the end of September this year.

So what do they stand to gain then? After the acquisition, CenturyLink anticipates free cash flow will be significantly improved by Level 3's almost $10 billion in aggregate net operating losses, which in turn should lower that payout ratio. That's not to mention the benefits of scale and infrastructure investment synergies both CenturyLink and Level 3 will enjoy through their combined fiber networks, as well as nearly $1 billion in expected annual synergies through operational efficiency and systems consolidation. Both companies also anticipate capitalizing on incremental revenue growth opportunities by deploying their product portfolios across the combined customer base.

"The combination of CenturyLink and Level 3 will significantly improve our global network capabilities, creating a company with one of the most robust fiber networks in the world," stated CenturyLink CEO Glen Post last week. "This expanded network should allow us to bring substantial operational and service benefits to our enterprise customers, as well as an enhanced customer experience."

As it stands, it's clear that uncertainty remains surrounding the impending merger. And even then there will be plenty of integration and consolidation work to do before CenturyLink and Level 3 can truly operate as a single, well-oiled machine. But assuming all goes as planned, I think CenturyLink stock at today's levels represents a compelling buying opportunity for patient, long-term investors.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Level 3 Communications, Inc. Stock Quote
Level 3 Communications, Inc.
Lumen Technologies Stock Quote
Lumen Technologies
$11.27 (2.92%) $0.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.