Author Topic: CTL - CenturyLink  (Read 91236 times)

petec

  • Hero Member
  • *****
  • Posts: 1724
Re: CTL - CenturyLink
« Reply #260 on: November 10, 2018, 09:57:11 AM »
Simple answer is I add the pension deficit to the debt.

Do you have the figure for cumulative contributions from 2011 to 2017? And do your figures adjust for the addition of the LVLT deficit (I assume that pension was in deficit).

Why do you consider the conditions to have been so favourable? My understanding was that low rates were unfavourable for deficits due to the impact of lowered discount rates on long term liabilities. Am I wrong?

As an aside, I donít think the investment case rests on the dividend. I think it rests on the FCF yield. I wish theyíd cut the damned dividend and delever because I see the debt as an existential threat in the bear case.

The issue I have with the FCF yield argument is I can get similar yields elsewhere with less risk, in businesses where I donít have to trust management that the revenue declines are down to unprofitable revenues and that I donít actually own a melting iceberg. Then again, if theyíre right and they can achieve any level of sustainable ebitda growth, this is a steal.


Cigarbutt

  • Hero Member
  • *****
  • Posts: 1427
Re: CTL - CenturyLink
« Reply #261 on: November 10, 2018, 12:29:32 PM »
Simple answer is I add the pension deficit to the debt.

Do you have the figure for cumulative contributions from 2011 to 2017? And do your figures adjust for the addition of the LVLT deficit (I assume that pension was in deficit).

Why do you consider the conditions to have been so favourable? My understanding was that low rates were unfavourable for deficits due to the impact of lowered discount rates on long term liabilities. Am I wrong?

As an aside, I donít think the investment case rests on the dividend. I think it rests on the FCF yield. I wish theyíd cut the damned dividend and delever because I see the debt as an existential threat in the bear case.

The issue I have with the FCF yield argument is I can get similar yields elsewhere with less risk, in businesses where I donít have to trust management that the revenue declines are down to unprofitable revenues and that I donít actually own a melting iceberg. Then again, if theyíre right and they can achieve any level of sustainable ebitda growth, this is a steal.
When I looked (stopped in 2015), CTL contributed 100M in each year, 2015, 2016 and 2017. As far as I recall, the LVLT pension funding was not a material issue (maybe some stuff from Global Crossing?).

For the discount rate, you are correct because lower discount rates render the obligation larger (higher value of PBO and higher current service costs). But, in a period where appraisal on the asset side is said to correlate so tighly (gravity concept) with interest rates, rules that I allude to in the previous post allow to build a gap between the discount rate used for PBO and the risk-free rate (rules allow to take a longer term perspective ie 25 years) with the idea that this gap will close over time. Risk-free interest rates since 2011 have remained low (maybe this is changing?) but the discount rates used have had a tendency to decrease less. So, in a way, there is a "gap" that has been built which will have a tendency to act as a negative margin of safety going forward as the values will tend to converge under any scenarios. There eventually may be a limit to the amend and extend process.

I understand your comment about the dividend and value your fundamental assessment but would like to mention that sometimes (not saying this necessarily applies to CTL though), the best time to buy such an opportunity is when the company announces a dividend cut and the market attributes a lower value whereas the intrinsic value for the interested observer may not change, giving rise to a potential opportunity. Is this happening with GE?

I will follow this idea but have to admit it is too complicated for me. Also, I often wonder about the situations where dividends are maintained when the most sensible thing to do would be to lower leverage to more reasonable levels. I wonder because of the of asymmetric reward that management may collect if things go well.
« Last Edit: November 10, 2018, 12:31:24 PM by Cigarbutt »

kab60

  • Hero Member
  • *****
  • Posts: 861
Re: CTL - CenturyLink
« Reply #262 on: November 10, 2018, 12:53:42 PM »
I've been tempted by this story and even though it's completely irrational the yield has probably played a role. I think it's really important to stay intellectually honest here, because the yield means nada to the intrinsic value. I'd also venture that with a new CFO on board it will be easier for them to slash it.

walkie518

  • Sr. Member
  • ****
  • Posts: 372
Re: CTL - CenturyLink
« Reply #263 on: November 12, 2018, 07:04:27 AM »
I'd also venture that with a new CFO on board it will be easier for them to slash it.
I disagree here.

I don't think the new CFO is detailing a different Storey

Despite rev decline, cash flow is ok, last 9 months shows $5B of cash flow against $2B of capex... back of the env, this keeps div intact ($1.7B/9 months) and whatever is left can go to debt pay down

matts

  • Full Member
  • ***
  • Posts: 202
Re: CTL - CenturyLink
« Reply #264 on: November 12, 2018, 10:27:39 AM »
I'd also venture that with a new CFO on board it will be easier for them to slash it.
I disagree here.

I don't think the new CFO is detailing a different Storey

Despite rev decline, cash flow is ok, last 9 months shows $5B of cash flow against $2B of capex... back of the env, this keeps div intact ($1.7B/9 months) and whatever is left can go to debt pay down

I see what you did there 8)

kab60

  • Hero Member
  • *****
  • Posts: 861
Re: CTL - CenturyLink
« Reply #265 on: November 12, 2018, 11:40:33 AM »
I'd also venture that with a new CFO on board it will be easier for them to slash it.
I disagree here.

I don't think the new CFO is detailing a different Storey

Despite rev decline, cash flow is ok, last 9 months shows $5B of cash flow against $2B of capex... back of the env, this keeps div intact ($1.7B/9 months) and whatever is left can go to debt pay down
I might be reading too much into it but I wasn't convinced when they talked about the divy. Agree cashflows look strong as well as ebitda margins increasing, but debt is high, operating leverage is high and revenues are shrinking. Do we think all or most of the revenue they lost is simply turning away bad business? I don't know but ain't comfortable.

Valuehalla

  • Sr. Member
  • ****
  • Posts: 326
  • Who wants to earn forever
Re: CTL - CenturyLink
« Reply #266 on: November 13, 2018, 01:46:37 AM »
That the FCF is up on a one time effect to 4 to 4,2B in 2019 is a positiv news.

I can not understand what is negative on it. If we deduct 2,3 B for the dividend payout from the FCF, 1,7 to 1,9 B is left to reduce the debt. That is a big part of total debt.

Longterm debt is now already at 35,749 B, down from 37,238 B end Q4 17. Delta = 1,489 B within 9 month!
So within 9 month, thy reduced longterm debt app 4%.

EBITDA margins and EBITDA are growing. The reaction of the market - CTL down 10% on the day after the figures came out - is crazy and a good opportunity to buy.

Here is a good article diving a little deeper into it:

https://seekingalpha.com/article/4221517-centurylink-another-bizarre-reaction?dr=1
« Last Edit: November 13, 2018, 01:57:20 AM by Valuehalla »
BRK FFH MKL LVLT CTL BAC WFC BMY MRK MCD MO PM

petec

  • Hero Member
  • *****
  • Posts: 1724
Re: CTL - CenturyLink
« Reply #267 on: November 13, 2018, 02:36:42 AM »
That the FCF is up on a one time effect to 4 to 4,2B in 2019 is a positiv news.

I can not understand what is negative on it. If we deduct 2,3 B for the dividend payout from the FCF, 1,7 to 1,9 B is left to reduce the debt. That is a big part of total debt.

Longterm debt is now already at 35,749 B, down from 37,238 B end Q4 17. Delta = 1,489 B within 9 month!
So within 9 month, thy reduced longterm debt app 4%.

EBITDA margins and EBITDA are growing. The reaction of the market - CTL down 10% on the day after the figures came out - is crazy and a good opportunity to buy.

Here is a good article diving a little deeper into it:

https://seekingalpha.com/article/4221517-centurylink-another-bizarre-reaction?dr=1

There's nothing negative about a one time benefit but we can't use it to value the company. Sustainable FCF is therefore key to focus on.

As I mentioned above you need to look at net debt not long term debt. Long term debt can come down while net debt goes up, so it's important. Net debt has fallen $700m this year - good, but not great, especially in a year with a roughly $1bn one off FCF benefit. It's quite possible that sustainable FCF, after the dividend and benefit obligation payments, is just a few hundred million. That's not a lot of debt paydown if ebitda stalls. And ebitda WILL stall if they can't stabilise revenues, because you can't cut costs forever. So right now an awful lot hinges on management's promise that the lost revenues are unprofitable. That implies that profitable revenues are flat to growing, but they don't actually say that, which worries me, because I don't know enough about the underlying drivers and competitive dynamics to get comfortable that revenue declines can be halted.

It seems to me that what Storey refers to as the transformation process is really going to be far more important than the integration process. 

Valuehalla

  • Sr. Member
  • ****
  • Posts: 326
  • Who wants to earn forever
Re: CTL - CenturyLink
« Reply #268 on: November 13, 2018, 03:24:00 AM »
Thx a lot for your comments Petec. I agree on your view.

How did you calculated net debt?
How high is net debt now?
BRK FFH MKL LVLT CTL BAC WFC BMY MRK MCD MO PM

petec

  • Hero Member
  • *****
  • Posts: 1724
Re: CTL - CenturyLink
« Reply #269 on: November 13, 2018, 03:39:00 AM »
Thx a lot for your comments Petec. I agree on your view.

How did you calculated net debt?
How high is net debt now?

I'm just using LT debt + ST debt - cash. You could do more complex calculations including any leases and unfunded benefit obligations but this calc captures most of what you need. So: $35,749+$778-$390 = $36,137, down from $37,175 at year-end (the q4 number does include some leases that seem to have gone away). So actually closer to $1bn paydown in 9 months, not $700m, but driven by some one offs.

There's another $3.7bn in other ST assets - I ought to delve into the notes and see what those are but presumably they are not near-cash items or they'd be disclosed as such.