Author Topic: CTL - CenturyLink  (Read 117058 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: February 18, 2019, 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.
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Spekulatius

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Re: CTL - CenturyLink
« Reply #362 on: February 18, 2019, 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.
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petec

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Re: CTL - CenturyLink
« Reply #363 on: February 18, 2019, 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.

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LightWhale

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Re: CTL - CenturyLink
« Reply #364 on: February 19, 2019, 07:22:14 AM »
Quote from:  Southeastern filed 13D

In light of such private market interest, we believe the preferred way
to improve the balance sheet should be through asset sales. Southeastern seeks
to add directors who will bring expertise to such discussions. If asset sales
are more likely in the intermediate term than the short-term, then Southeastern
believes that separate target stocks should be considered for the fiber network
business and for the Consumer business. Such target stocks, or tracking stocks,
would highlight the value in the two disparate parts of CenturyLink, would
provide a path towards eventual actual separation of these segments, and would
add capital allocation flexibility for the Company.


dwy000

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Re: CTL - CenturyLink
« Reply #365 on: February 19, 2019, 07:38:09 AM »
The 22%-33% FCF is wonderful only if you can get your capital back.  With revenue drops of 3-4% you simply cannot keep cutting costs fast enough to offset.  And with lower revenues, even the margins will start to shrink soon - and that's a train you cant get off of fast enough.  Unless revenues stabilizes this is a melting ice cube where you need those dividends to repay your initial capital before you can start thinking about returns.

mcliu

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Re: CTL - CenturyLink
« Reply #366 on: February 19, 2019, 08:22:36 AM »
Quote from:  Southeastern filed 13D

In light of such private market interest, we believe the preferred way
to improve the balance sheet should be through asset sales. Southeastern seeks
to add directors who will bring expertise to such discussions. If asset sales
are more likely in the intermediate term than the short-term, then Southeastern
believes that separate target stocks should be considered for the fiber network
business and for the Consumer business. Such target stocks, or tracking stocks,
would highlight the value in the two disparate parts of CenturyLink, would
provide a path towards eventual actual separation of these segments, and would
add capital allocation flexibility for the Company.

Thought these guys were long-term investors. Seems like a short-term way of boosting stock prices.

I think CenturyLink's finally making the right moves by cutting the dividend and repaying debt. People are worried that the dividend cut is an implicit sign that cash flows will deteriorate. Which is true in most cases, but not here. This just seems like just prudent capital allocation; make the business safer and get capital allocation flexibility. Guidance also suggests that EBITDA will be stable. The melting ice cube scenario is also not relevant here. At some point, the legacy business will go to zero and the good business will take over..

On valuation, why look at CTL on a levered basis? A double-digit levered-FCF yield is meaningless when the cap structure is mostly debt..

dwy000

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Re: CTL - CenturyLink
« Reply #367 on: February 19, 2019, 10:08:35 AM »
Quote from:  Southeastern filed 13D

In light of such private market interest, we believe the preferred way
to improve the balance sheet should be through asset sales. Southeastern seeks
to add directors who will bring expertise to such discussions. If asset sales
are more likely in the intermediate term than the short-term, then Southeastern
believes that separate target stocks should be considered for the fiber network
business and for the Consumer business. Such target stocks, or tracking stocks,
would highlight the value in the two disparate parts of CenturyLink, would
provide a path towards eventual actual separation of these segments, and would
add capital allocation flexibility for the Company.

Thought these guys were long-term investors. Seems like a short-term way of boosting stock prices.

I think CenturyLink's finally making the right moves by cutting the dividend and repaying debt. People are worried that the dividend cut is an implicit sign that cash flows will deteriorate. Which is true in most cases, but not here. This just seems like just prudent capital allocation; make the business safer and get capital allocation flexibility. Guidance also suggests that EBITDA will be stable. The melting ice cube scenario is also not relevant here. At some point, the legacy business will go to zero and the good business will take over..

On valuation, why look at CTL on a levered basis? A double-digit levered-FCF yield is meaningless when the cap structure is mostly debt..

Double-digit levered FCF yield isn't meaningless if the business is stable.  The FCF yield is after debt service.  If the business is stable that's the FCF to equity.  If the business is shrinking it becomes a question of who gets the cash flow - debt repayment or equity holders.

LightWhale

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Re: CTL - CenturyLink
« Reply #368 on: February 25, 2019, 09:35:58 PM »
J.S. spoke yesterday at a Morgan Stanley conference. His take-home message was that he cannot predict revenue growth because the industry's per-service prices shrink over time. But while technology drives down prices, it also reduces the cost of providing those services. So demand for the services is ever increasing, price per-unit is shrinking, and as long as the company executes well, costs shrink even faster.  He exemplified it with the last five years of LVLT: revenues grew for enterprise customers more moderately than expected, but FCF grew substantially and not through the cutting of capex.

Unfortunately it does little to demystify CTL's trajectory.
« Last Edit: February 26, 2019, 03:02:58 AM by LightWhale »

walkie518

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Re: CTL - CenturyLink
« Reply #369 on: March 04, 2019, 07:23:39 AM »
looks like revenue recognition is flawed but there are no expected, material changes to the previous press release? how can this be?

this is turning into a mess...worse the accounting is under question not on the CTL-side but on Level 3...

https://www.sec.gov/Archives/edgar/data/18926/000119312519061757/d706860dnt10k.htm