The third-largest U.S. landline operator CenturyLink
Inc. (CTL) reported first quarter 2011 results on May 5.
Adjusted earnings per share of 76 cents beat the Zacks Consensus
Estimate by 4 cents. However, earnings were 17 cents lower than the
year-earlier results.
First Quarter Review
CenturyLink generated disappointing revenues in the quarter due
to sustained erosion in access lines and ongoing migration from
fixed lines to wireless. The company is enjoying strong demand for
its broadband business as reflected by consistent growth in
subscriber base.
The company improved its liquidity position by reducing
long-term debt by $0.15 billion and increasing cash and cash
equivalents by $96.8 million.
Subsequent to the quarter end, CenturyLink completed its merger
with Denver-based Qwest Communications. In late April, the company
announced its intention to acquire an information technology
services provider Savvis Inc. (SVVS) in order to
enter the cloud computing business. The transaction will be
completed in the second half of the year and is awaiting approval
from antitrust regulators and Savvis shareholders.
Combining CenturyLink and Qwest operations, the company expects
operating revenues in ranges of $4.40–$4.43 billion and $14.9–$15.1
billion for the second quarter and fiscal 2011, respectively.
Earnings are expected to be 63 cents to 67 cents and $2.55 to $2.65
per share for the second quarter and fiscal 2011, respectively.
(Read our full coverage on this earnings report: CenturyLink
Beats, Falls Y/Y)
Agreement of Analysts
Following the first quarter earnings, the analysts are skewed
more toward the negative side in estimate revisions for the
upcoming quarter and fiscal year. This trend was noticed over both
the last 7 days and 30 days.
For the upcoming quarter, out of 10 analysts, 4 and 1 revised
their estimates downward over the last 30 days and 7 days,
respectively. Only 1 analyst made an upward revision in the last 7
days while none moved in the same direction in the last 30
days.
For fiscal 2011, 4 and 1 analysts out of 7 made downward
revisions over the last 30 days and 7 days, respectively, while
none moved in the opposite direction.
For fiscal 2012, out of 18 analysts, 4 and 1 revised their
estimates downward over the last 30 days and 7 days, respectively.
3 analysts made upward revisions in both time spans.
The analysts are concerned about persistent erosion in access
lines, migration of fixed-line to wireless services,competitive
threats from cable TV operators and high debt levels.
Although CenturyLink reduced its debt in the reported quarter,
the analysts still considered the level (roughly $7.2 billion)
March 31, 2011 as high. Its debt position is further burdened with
the assumption of Embarq and Qwest debt.
The integration of Qwest operations is a threat to the company
and will increase operating costs going forward. The integration
will incur approximately $650 million to $800 million of operating
costs over three to five years and approximately $150 million to
$200 million of one-time capital costs.
CenturyLink has to integrate several systems and procedures
including re-branding, billing, management information, purchasing,
payroll and benefits, fixed asset, lease administration and
regulatory compliance. In addition, the combined company will have
to expand its services to large urban areas where CenturyLink has
limited operating experience.
Magnitude –– Consensus Estimate Trend
The Zacks Consensus Estimate for the second quarter declined to
67 cents from 68 cents over the last 7 days and 74 cents,
respectively, over the last 30 days. The estimate represents a
substantial 24.09% decline year over year.
Similarly, for fiscal 2011, the Zacks Consensus Estimate reduced
to $2.74 from $2.83 over the last 7 days and $2.95 over the last 30
days. The estimate represents a 19.13% decline year over year.
For fiscal 2012, the Zacks Consensus Estimate remained static at
$3.04 over the last 7 days but increased by 3 cents over the last
30 days. The estimate represents an increase of 10.87%
annually.
The analysts expect earnings to accelerate in the upcoming
years. They believe the company remains focused on investing in
broadband services to expand network capacity and improving returns
to its shareholders through healthy dividend payouts. CenturyLink
continues to generate substantial benefits fromEmbarqand Qwest
acquisitions and expects the pending Savvis acquisition to generate
further synergies going forward.
The Qwest merger will generate annual synergies of approximately
$625 million over the three to five years. The Savvis transaction
is expected to be accretive to CenturyLink’s free cash flow in the
initial year following closure and generate cost synergies of
roughly $70 million.
Further, the acquisitions and mergers will provide CenturyLink a
competitive edge over its two major rivals,
AT&T Inc. (T) and
Verizon Communications Inc. (VZ),
with more operational efficiency in a mature U.S. home-phone
market.
Earning Surprises
With respect to earnings surprises, the company’s fairly good
track record is expected to continue in the coming quarters.
CenturyLink produced a positive average earnings surprise of 2.94%
over the last four quarters, which suggests that it outpaced the
Zacks Consensus Estimate by that amount over the last year.
Neutral Recommendation
We believe the growth momentum for the company’s broadband
Internet business was more than offset by losses in the fixed voice
access lines. While the merger with Embarq and Qwest as well as the
pending Savvisacquisition may yield a number of operational
benefits and cost synergies, significant integration challenges may
impede operating performance ahead. Thus, we are maintaining our
long-term Neutral recommendation on CenturyLink.
For the short term, we remain cautious on the carrier’s high
debt exposure, which addsa degree of operating risk. Coupled with
competitive threats and persistent access lines erosions, we have a
Sell rating with a Zacks #4 Rank.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years
ago that earnings estimate revisions are the most powerful force
impacting stock prices. He turned this ground breaking discovery
into two of the most celebrating stock rating systems in use today.
The Zacks Rank for stock trading in a 1 to 3 month time horizon and
the Zacks Recommendation for long-term investing (6+ months). These
“Earnings Estimate Scorecard” articles help analyze the important
aspects of estimate revisions for each stock after their quarterly
earnings announcements. Learn more about earnings estimates and our
proven stock ratings at:
http://www.zacks.com/education/
CENTURYTEL INC (CTL): Free Stock Analysis Report
SAVVIS INC (SVVS): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
Zacks Investment Research
Savvis, Inc. (MM) (NASDAQ:SVVS)
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