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CenturyLink Loves Growth
Posted by: Muhammad Bazil (IP Logged)
Date: June 19, 2012 09:49AM

The contemporary investment space is particular on growth. Stocks that have a reputable track record with regards to growth are usually kept in the crosshairs of investors. CenturyLink (CTL) is a good example.

To some, this may sound preposterous at the least. After all, CenturyLink did record a 5.2% dip in earnings during the first quarter of fiscal year 2012. The dip in earnings is a setback- there is no argument about that. It represents a slight slip, however. It is just one of many bumps that are all too common in the rise to greatness.

There is actually some real daylight between the CenturyLink that was a few years back and the one that drums a message of dominance today. All through, profound emphasis on growth has been the driving force behind its prosperity.

This is quite evident in its distinctive approach towards acquisitions. It is not afraid to catch the big fish, and from my view occasionally stretches its resources beyond rationality in pursuit of greatness, involving risk. As the adage goes, with great risk comes great reward. CenturyLink’s peerless risk appetite helped it cast its net over Qwest in 2011. This $24 billion acquisition topped headlines for quite some time.

The CenturyLink-owned Qwest unit has since resurfaced in recent news. The unit is expected to sell around $400 million in debt. This will take place through the sale of notes due 2052. This move is purposely geared towards redeeming around $484 million of notes due 2023. The 2023 due notes have a higher interest rate than the 2052 notes- 7.5% as opposed to 7%. This wise move is a demonstration of tact and strategy. CenturyLink knows that in order to maintain an upward trend, it needs to streamline operations and most importantly provide good cushioning in critical areas like debt. This is exactly what it is doing.

What other growth prospects are lined up in the pipeline?

Nomura analysts have reason to believe that CenturyLink is again looking for an acquisition. This time it is looking to place a foot in the wireless frontier. Although these are mere speculations absent guarantee of materialization, they indeed carry a lot of logical sense. CenturyLink needs to add credible wireless providers to its portfolio. The technological environment currently has an inherent slant towards wireless services, and CenturyLink stands to gain a lot of it can effectively filter through the wireless niche.

In my line of thought, it is a matter of timing and not lack of opportunity. I believe that CenturyLink is aware of the growth opportunities in wireless services; it is however waiting for the perfect moment to make an entrance.

Moving from speculations to real events — CenturyLink recently won a Social Security Administration task order. The task order which is valued at $233 million will see CenturyLink extend data networking services to the Social Security Administration for the next five years. This $233 million task order falls under the umbrella of the Newtworx Universal contract and will magnify CenturyLink’s upstanding disposition in the telecommunication front.

In other news, CenturyLink’s interests in extending cable TV in Colorado Springs have come to light. The outset of this service is slated for early next year and will require an investment of close to $20 million. From an honest outlook, securing market share in Colorado is not a major game changer. But it adds up to the crucial steps needed to minimize the incredibly big gap between CenturyLink and belligerent competitors like Verizon (VZ) and AT&T (T).

CenturyLink loves to grow. Its hunger for meaningful acquisitions and entry into untapped markets pretty much tells the story.

The cons

It is not a frictionless journey for CenturyLink. It would be out of order to assume that the telecommunication heavyweight is operating in an isolated environment. In fact, CenturyLink’s environment is submerged in deep competition. The odds are quite lopsided, as it has to battle out with the Goliaths of telecommunication — Verizon and AT&T.

Look at the numbers.

AT &T Verizon CenturyLink
Market Cap 209.37B 123.73B 23.84B
Net Income 4.12B 2.65B 562M
Quarterly revenue growth 0.02 0.05 1.72

I don’t typically delve into details like market cap, but these figures tell a lot. It is clearly evident that CenturyLink and its core competitors are realms apart. Verizon and AT&T have a stronger financial backing and can easily bottleneck CenturyLink’s penetration into other more favorable markets. All the same, I advocate for the idea that CenturyLink has the edge. Its quarterly revenue growth compared to that of its competitors is simply amazing. Similarly, it manages to convert most of its revenue into net income. As far as growth is concerned, this is a huge plus.

In conclusion, I would say that Century Link is a good option for the long run. In the short run, it would be advisable to hold. Better days are yet to come.


Stocks Discussed: CTL, T, VZ,
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