CTL - CenturyLink

[LightWhale]

Does this company repurchase stock in any meaningful way?

They don't have the CF buffer for that. The current annual dividend is equal to repurchasing 15% of the company every year. Financially, at 20% FCF, it would make sense to eliminate the dividend and buy back stock, but that could affect reputation vs. clients and employees, igniting severe economic consequences.

The x5 FCF multiple stems from heightened risk. If management cannot give revenue guidance, it's hard to get comfortable with future EBITDA & the dividend. Plus they will need to roll some of the bonds in a year, while their debt/EBITDA is deteriorating. But if one ignores capital allocation entirely, the risk reward is favourable - it trades like a melting ice cube despite a worst case scenario of 3% annual revenue contraction in an industry which is relatively recession resistant.       

[petec]

Debt/ebitda is improving.

[Valuehalla]

CTL development in 2018:

                                        Q1                               Q2                                  Q3

Revenue                           5,945 B                         5,902 B                          5,818 B
 
EBITDA                            2,074 B                          2,111 B                          2,228 B

adj. EBITDA                      2,181 B                         2,271 B                          2,287 B                         

EBITDA Margin                  34,9 %                           38,5 %                          39,3 %

Lomg Term Dept                36,94 B                          36,78 B                          35,749 B

NetDept to adj EBITDA          x 4.3                             x 4.2                            x 4.1

Operat. CF                        1,667 B                           1,58 B                            1,787 B

FCF                                    852 M                            811 M                             1,103 B

EPS                                     0,11                              0,27                               0,25

Markt Cap
(at day figures came out)      19,464 B                      20,02 B                            22,08 B

Market Cap today: 20,43 B

Market Cap today 15,2 B

[walkie518]

CTL development in 2018:

                                        Q1                               Q2                                  Q3

Revenue                           5,945 B                         5,902 B                          5,818 B
 
EBITDA                            2,074 B                          2,111 B                          2,228 B

adj. EBITDA                      2,181 B                         2,271 B                          2,287 B                         

EBITDA Margin                  34,9 %                           38,5 %                          39,3 %

Lomg Term Dept                36,94 B                          36,78 B                          35,749 B

NetDept to adj EBITDA          x 4.3                             x 4.2                            x 4.1

Operat. CF                        1,667 B                           1,58 B                            1,787 B

FCF                                    852 M                            811 M                             1,103 B

EPS                                     0,11                              0,27                               0,25

Markt Cap
(at day figures came out)      19,464 B                      20,02 B                            22,08 B

Market Cap today: 20,43 B

Market Cap today 15,2 B

adding up the first 3 quarters, you get $2766 FCF with a $3.1B target...wonder how much rev deterioration is baked into the current price?  20%?

[LightWhale]

Debt/ebitda is improving.

Sorry for a late response, and also for the ambiguous claim. The debt ratio has improved over the last quarters, but deteriorated against the merger projections, benchmarked at 3.7x (including synergies) as the start of a deleveraging trajectory. Plus there were talks about industry consolidation and improved pricing. Instead, two years after those projections, CTL is at 4.1x with synergies almost fully captured, and the price curve is downward sloping with cable eating away parts of the fibre pie. As operators, this leaves almost no room for execution mistakes (e.g., the christmas shutdown). On the other hand, as shareholders, the stock price leaves a lot of room for positive surprises.

BTW, in Moody's report from December, adjusted EBITDA is strangely at 4.6x. Can any of you guys explain this figure?

Looking forward to Wednesday's results and call.

[tylerdurden]

Synergies are not “almost fully captured”. They are in transformation phase for the merger which should still provide material synergies going forward.

[LightWhale]

I agree but was referring to projected synergies, as anything else has not been pegged and is just nebulous. what's your number?

The bears (e.g., City) forecast 2020 EBITDA of 8.6-8.7B with ~2% revs compression down the road. As long as CTL can maintain EBITDA above 9B, which i think is likely, this investment should turn out well. If they give guidance on cost savings from transformation on tomorrow's call, and it's higher than 250m in two years, that should relieve the pressure from revenue decline.

[petec]

The “transformation” (as distinct from the merger synergies) seems to go deeper than putting two companies together. It’s more about simplifying and digitalising so customers don’t call you etc. If they get that right it could be a big number. $250m is less than 2% of the cost base. I’m betting they can exceed that.

The more existential question is whether they’re losing profitable or unprofitable revenues. If it’s only the latter then concerns are unfounded. But I think there’s been a realisation that some of the 500-700bps ebitda margin expansion they’ve been taking about might come via cutting unprofitable revenues rather than just by cutting costs. The implications for absolute ebitda and FCF are obviously very different. I suspect some of the spoke earlier this year was people pencilling in a low 40% ebitda margin on flat revenues and some of the drop has been people reducing that revenue assumption.

I think they’re going to surprise people on costs and margins over the next few years. But I don’t have a good handle on revenues. I get that there are unprofitable revenues to cut and it’s a competitive industry, but my gut says that with a backdrop of booming data demand in a newly consolidated industry, it shouldn’t be *this* hard.

[petec]

Finally some common sense. Dividend halved to $1/share.

[walkie518]

Finally some common sense. Dividend halved to $1/share.

this is the largest negative though likely a long-term positive should they speed up leverage unwind

at the same time, stock is going to take a real hit tomorrow, down 10% AH

$4B FCF sounds pretty good though on a $16B mcap

I would think that the recent decline, however, priced in the divi cut...