What happened
Shares of CenturyLink (CTL 4.05%) have dropped today, down by 6% as of 12:10 p.m. EDT, after the company received a downgrade from Wall Street. The COVID-19 pandemic is expected to hurt the regional telecom's business, which is already fragile.
So what
Citi analyst Michael Rollins has cut his rating on CenturyLink shares from neutral to sell and slashed his price target from $13 to $6. The novel coronavirus outbreak has created new risks to the wireline business over the next two years, particularly as recession fears loom due to the unprecedented crisis.
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CenturyLink has been investing heavily in that segment in an effort to win over business customers and may see a short-term bump in demand for VPN services and other remote work offerings, but Rollins expects conditions to deteriorate in the back half of the year.
Now what
The challenges come as CenturyLink has been trying to reduce its net debt load, which declined by about $2 billion in 2019. That brought its net-debt-to-adjusted-EBITDA ratio down to 3.7, but Rollins believes this metric could creep higher toward 4 in 2021. CenturyLink posted a GAAP net loss of $5.3 billion last year and has $2.3 billion in debt maturities coming due this year.
CenturyLink now faces heightened risk that revenue will erode faster than expected, while at the same time it may need to continue investing in fiber to remain competitive with larger telecommunications rivals, according to Rollins.
