Author Topic: CTL - CenturyLink  (Read 86919 times)

sarganaga

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Re: CTL - CenturyLink
« Reply #360 on: February 17, 2019, 11:22:29 AM »
@sarganaga - mind sharing your thesis?

@kab60 - yes I noticed that. Not sure they are looking but clearly open to an offer. Impact depends on cash price vs how much ebitda consumer generates, which we don't know. I doubt they are very integrated with enterprise though - very different businesses and go-to-market, plus one of the major cost/service issues is that CTL is a rollup that *hasn't* been properly integrated.

First, I don't have any deep insight into the company. I bought it because it's cheap, strengthening its balance sheet, & paying a well covered fairly large dividend. Paying down debt proactively is probably key for me. As long as they do this & don't waste the money saved from the dividend cut, I think this has a good chance to work out well. As far as timing, the stock cratered on large volume the day the unanticipated dividend cut was announced, with widespread anger toward CTL expressed on stock market message boards. Looked like a good entry point to me.


petec

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Re: CTL - CenturyLink
« Reply #361 on: Today at 12:55:57 AM »
Some back of the envelope scenarios for FCF yields in 3 years' time at today's $13.74/share ($14.85bn market cap):

Scenario 1: Start with low end of 2019 FCF guide, $3.1bn. Assume 3 years of 3% revenue decline = $2bn of lost revenue, which at a 40% ebitda margin = $800m lost. Assume low end of 3y cost save guide = $800m saved. Assume $6bn of debt paydown at 4% = $240m saved. Totals $3.3bn FCF or a 22% FCF yield.

Scenario 2: Taking the middle of the 2019 and cost save guides, and 3 years of 1% revenue decline at a 40% margin, it's $3.25bn - $280m +$900m + $240m = $4.1bn FCF and a 27% FCF yield.

Scenario 3: Taking the top of the guidance ranges and 3 years of 1% growth at a 40% margin it's $3.4bn + $280m + $1bn + $240m = $4.9bn FCF and a 33% FCFY.

This assumes ebitda changes drop straight to FCF. Effectively I am assuming that working capital, capex, and interest are fixed and they don't pay tax.

My conclusion is that revenue trends have to worsen from here for this to look expensive. Any evidence of revenue stabilisation will be good for the stock.

Spekulatius

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Re: CTL - CenturyLink
« Reply #362 on: Today at 04:09:08 AM »
Some back of the envelope scenarios for FCF yields in 3 years' time at today's $13.74/share ($14.85bn market cap):

Scenario 1: Start with low end of 2019 FCF guide, $3.1bn. Assume 3 years of 3% revenue decline = $2bn of lost revenue, which at a 40% ebitda margin = $800m lost. Assume low end of 3y cost save guide = $800m saved. Assume $6bn of debt paydown at 4% = $240m saved. Totals $3.3bn FCF or a 22% FCF yield.

Scenario 2: Taking the middle of the 2019 and cost save guides, and 3 years of 1% revenue decline at a 40% margin, it's $3.25bn - $280m +$900m + $240m = $4.1bn FCF and a 27% FCF yield.

Scenario 3: Taking the top of the guidance ranges and 3 years of 1% growth at a 40% margin it's $3.4bn + $280m + $1bn + $240m = $4.9bn FCF and a 33% FCFY.

This assumes ebitda changes drop straight to FCF. Effectively I am assuming that working capital, capex, and interest are fixed and they don't pay tax.

My conclusion is that revenue trends have to worsen from here for this to look expensive. Any evidence of revenue stabilisation will be good for the stock.

Isnít Scenario #1 pretty much what happened in the past? It seems pretty much a continuation of the existing trend, so itís not surprising that the stock has this as a baseline. I would argue that you need a worst case scenario with even worse revenue trends.
To be a realist, one has to believe in miracles.

petec

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Re: CTL - CenturyLink
« Reply #363 on: Today at 06:16:43 AM »
@Spek - yes, it's what's happening now more or less. If you assume a 5% revenue decline you get to a 19% FCF yield and if you add a 70% contribution margin, 12%. But I haven't seen clear arguments why revenues should get worse. If you have please point me towards them. The debate seems to be more about whether things can improve or not. Given the disruptions of the merger, fx impacts, higher capex, the effort to transform the products and services (making it easier to do business with CTL), and the simple maths of shrinking revenue streams becoming a smaller part of the mix, I am inclined to think the trend should improve - but I don't know how much.

@Vinod. Good question. I have struggled to calculate contribution margins for revenues lost thus far because the data is muddied by accounting changes and earnings adjustments. If I assume a 70% contribution margin the FCFY outputs are 18%, 26%, and 34%. Even at 100% the Scenario 1 FCFY is 14%. As for further cost cuts, the $800-1bn 3-year plan announced last week roughly offsets between two-thirds and all (depending on the contribution margin) of the ebitda loss if revenues decline 3% each year for 3 years. If revenues continue declining after that then yes, they need more cost cuts. I'm moderately confident on that front. Everything I have heard suggests the company's systems and processes are inefficient. Storey describes them as "decades old", and the plan to change them as "transformational". Yet the cost cuts announced last week are under 7% of the $15bn total. My read is either there's more to come or Storey is confident the changes will drive revenue or both. Plus, they've guided to a 3 year realisation period for the $0.8-1bn, but they've already said they'd like to accelerate that. Their record on the synergies - taking 1 year to achieve what they targeted for 3 - is impressive. All that said, I take the point that in the end you reach a point where you can't cut more. That's why cutting the dividend and paying down debt is so important.