Author Topic: CTL - CenturyLink  (Read 95792 times)

sarganaga

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Re: CTL - CenturyLink
« Reply #370 on: March 04, 2019, 01:41:22 PM »
I dumped mine on 2/21. I felt like I had a good entry point early on the day after the big dump. It looked to me like the news sellers had made a mistake, but exited after it traded back down to my entry point. 


Cigarbutt

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Re: CTL - CenturyLink
« Reply #371 on: March 15, 2019, 10:59:24 AM »
The 10-K has been filed.
Here are some thoughts about a small part of the whole picture, the pension-related potential cashflow effects.

The risk-reward looks better now but the business remains in the too hard pile especially given the usual absence of materializing expected "synergies".

The following is food for thought for those going long because the pension liabilities will somehow likely impact cashflows going forward, either in a slow insidious way or in a sudden and unexpected way. BTW, the pension part of the balance sheet probably "looked" good at the end of Q3 2018 (higher discount rate, benign stock market environment and after a 500M voluntary contribution (to maximize tax benefit)) but Q4 kind of ruined the numbers and I wonder how this reversal of fortune played a role in the dividend decision.

This post focuses on the defined pension liability as the PRBP (even if quite large) can be dealt with more easily. After the 2018 500M contribution, the unfunded part of the defined pension plans went from 2,00B to 1,56B, looking OK from the surface. However, on the asset side, for the 2018 year, the contribution was mitigated by a 349M loss on investments. Most of the improvement for the unfunded part came from adjustments on the liability side. The discount rate used was 4,29% vs 3.57% last year. Interesting because last year 3,57% looked mid-range but 4,29% looks stretched upwards. Typical long-term corporates went from about 3,60% to 3,95% and FFH, for instance, went from 3,2% to 3,6% this year. Maybe, the discount rate is appropriate for the duration of their pension liabilities or there are good reasons but, if anything, the duration seems to have decreased and there may be an element of a less conservative bias. The actuarial gain on the PBO side was 765M, mostly, I assume, from using a higher discount rate. Interesting to note that a small part of the actuarial gain in 2018 came from retirees living progressively shorter lives (a new phenomenon being recognized in the US) with a 38M gain recognized in 2018 and a total of a 419M gain in the last 3 years for that specific item. No wonder Corporate America is in no rush reforming healthcare for a better value proposition as the higher medical costs are more than compensated by people dying sooner, giving rise to a very convenient natural curtailment option.

Another interesting feature is that CTL (like many peers) has "benefitted" from relaxation rules adopted years ago allowing companies to delay the recognition (deferral and amortization) of insufficient funding. It's hard to get to specific numbers (and one has to make up his or her mind about appropriate expected returns etc) but looking at historical numbers and using the corridor concept, it appears that CTL has reached its limit in terms of deferral and amortization. Looking at the net periodic benefit expense over time (since 2010 and 2011 when these rules became relevant), the recognition of excess actuarial loss started as a non-material amount and now has reached its cruising speed (178M last year, and avg 185M in each of the last 3 years). This expense has no current year direct cashflow implication but will have to be met by eventual true cashflows.

In an ideal world, the defined pension plan's sweet spot in terms of funding should be around 105 to 110% and how CTL will get there is likely a topic left for a later discussion by the Board.

In 2007, CTL had a PBO of 469M and the plan was 98% funded. At the end of 2008, the plan became 76% funded after a 52.5M contribution. In 2008, CTL recorded a 28% loss on assets. Q4 2018 felt awkward but it was not exactly an earthquake.

Anyways, it seems like a significant risk to me, even if peripheral. The top 100 US defined pension plans have an unfunded pension liability to market cap of about 3%. Market cap for CTL these days fluctuates around 13B.

I guess, in the long run, we'll be all dead and Kraven (H/T to a recent post by John Hjorth) used to say "There has to be a balance between the view of value investing as the hanging of beautiful art in a museum and real life" but to win the race, you have to finish the race.

tylerdurden

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Re: CTL - CenturyLink
« Reply #372 on: March 16, 2019, 03:39:38 PM »
You don’t think they are doing at least ok reagarding “materalizing expected synergies”?

I think the most important reason to own this is their record so far on synergies. Declining revenues is different matter of course...

The 10-K has been filed.
Here are some thoughts about a small part of the whole picture, the pension-related potential cashflow effects.

The risk-reward looks better now but the business remains in the too hard pile especially given the usual absence of materializing expected "synergies".

The following is food for thought for those going long because the pension liabilities will somehow likely impact cashflows going forward, either in a slow insidious way or in a sudden and unexpected way. BTW, the pension part of the balance sheet probably "looked" good at the end of Q3 2018 (higher discount rate, benign stock market environment and after a 500M voluntary contribution (to maximize tax benefit)) but Q4 kind of ruined the numbers and I wonder how this reversal of fortune played a role in the dividend decision.

This post focuses on the defined pension liability as the PRBP (even if quite large) can be dealt with more easily. After the 2018 500M contribution, the unfunded part of the defined pension plans went from 2,00B to 1,56B, looking OK from the surface. However, on the asset side, for the 2018 year, the contribution was mitigated by a 349M loss on investments. Most of the improvement for the unfunded part came from adjustments on the liability side. The discount rate used was 4,29% vs 3.57% last year. Interesting because last year 3,57% looked mid-range but 4,29% looks stretched upwards. Typical long-term corporates went from about 3,60% to 3,95% and FFH, for instance, went from 3,2% to 3,6% this year. Maybe, the discount rate is appropriate for the duration of their pension liabilities or there are good reasons but, if anything, the duration seems to have decreased and there may be an element of a less conservative bias. The actuarial gain on the PBO side was 765M, mostly, I assume, from using a higher discount rate. Interesting to note that a small part of the actuarial gain in 2018 came from retirees living progressively shorter lives (a new phenomenon being recognized in the US) with a 38M gain recognized in 2018 and a total of a 419M gain in the last 3 years for that specific item. No wonder Corporate America is in no rush reforming healthcare for a better value proposition as the higher medical costs are more than compensated by people dying sooner, giving rise to a very convenient natural curtailment option.

Another interesting feature is that CTL (like many peers) has "benefitted" from relaxation rules adopted years ago allowing companies to delay the recognition (deferral and amortization) of insufficient funding. It's hard to get to specific numbers (and one has to make up his or her mind about appropriate expected returns etc) but looking at historical numbers and using the corridor concept, it appears that CTL has reached its limit in terms of deferral and amortization. Looking at the net periodic benefit expense over time (since 2010 and 2011 when these rules became relevant), the recognition of excess actuarial loss started as a non-material amount and now has reached its cruising speed (178M last year, and avg 185M in each of the last 3 years). This expense has no current year direct cashflow implication but will have to be met by eventual true cashflows.

In an ideal world, the defined pension plan's sweet spot in terms of funding should be around 105 to 110% and how CTL will get there is likely a topic left for a later discussion by the Board.

In 2007, CTL had a PBO of 469M and the plan was 98% funded. At the end of 2008, the plan became 76% funded after a 52.5M contribution. In 2008, CTL recorded a 28% loss on assets. Q4 2018 felt awkward but it was not exactly an earthquake.

Anyways, it seems like a significant risk to me, even if peripheral. The top 100 US defined pension plans have an unfunded pension liability to market cap of about 3%. Market cap for CTL these days fluctuates around 13B.

I guess, in the long run, we'll be all dead and Kraven (H/T to a recent post by John Hjorth) used to say "There has to be a balance between the view of value investing as the hanging of beautiful art in a museum and real life" but to win the race, you have to finish the race.

Cigarbutt

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Re: CTL - CenturyLink
« Reply #373 on: March 17, 2019, 06:46:06 AM »
You don’t think they are doing at least ok reagarding “materalizing expected synergies”?

I think the most important reason to own this is their record so far on synergies. Declining revenues is different matter of course...

...
The risk-reward looks better now but the business remains in the too hard pile especially given the usual absence of materializing expected "synergies".
...
I stand by the substance of my post about the pension liability potential negative cash flow issues but you are correct about that specific statement which conveys a conclusion which appears too strong and was based on limited work done on my part concerning the underlying core business. The statement also assumes that the apparent lack of conservatism for risk management at the pension liability levels permeates through the firm.

Here’s (FWIW) an expanded and improved version of that statement:

CTL has been able, in the past, to offset traditional asset revenue decline by completing and integrating acquisitions (Embarq in 2009, Qwest in 2011 and others) but the acquisition record, while good in some respects (including the realization of “synergies”), shows a mixed record in terms of the quality and pricing power of acquired legacy assets. It appears that a similar scenario may play out with the combination with LVLT in 2017. Also, an argument could be made that LVLT was a better business (enterprise focus and others), was even better at integrating acquisitions (Global Crossing, Tw telecom and others) and, with the new CEO, CTL may have become more a continuation of LVLT than the previous slow drifting CTL. However, the better acquisition outcomes by LVLT may be related to the fact that the CEO happened to ride the good waves to some extent, the 2017 combination involved a large premium (even accounting for the LVLT 10B NOLs) and resulted in a highly leveraged entity. It seems that present management is achieving the “synergies” (network-related, administrative and some capex-related) but the present capital structure and the growing importance of legacy assets in the evolving industry environment make the realization of the “synergies” even more important. The post provided simply illustrated how a relatively peripheral issue (pension liability) could combine with high leverage and showed how thin the margin of safety really is.

The dividend cut of over 50% was the right thing to do (the dividend cut should have happened a long time ago IMO) and may have given rise to an opportunity but not one I’m able to see, even at this level because the timing and nature of the dividend cut decision, in this case, may be a reflection of weakening top-line projections and the amount of time it will take to realize the “synergies” and the “transformation”.

If forced to bet, I would say that, despite the huge investments made by competitors in wireless and cloud services, CTL has the potential to eventually produce healthy and even rising free cashflows but one has to assume that the economic, business customer and interest rate spread environments will remain benign for quite some time.

The pension liability risk management issue is simply a reflection of that.