Description
I would say Apples and Oranges but Qualcomm might object to being called an apple...
I'm thinking a little about Qualcomm (just written up by value1929) which is controversial because of the FTC anti-trust suit (trial ended a couple weeks ago) and the on-going licensing dispute with Apple. Kerrisdale recently wrote up a piece talking about how if QCOM loses the FTC case their EPS could drop to $1.60 (QCOM is a $50 stock) from just under $4 today.
I offer no opinion on QCOM here.
Anyway, why do I bring this up? Centurylink! and its valuation post the dividend cut...
QCOM which faces an existential crisis is expected to generate $3.2 billion of FCF in 2019, a number that is remarkably similar to CTL's $3.25 except QCOM has $4 billion of Net Debt ($16 billion gross) while CTL has $35.6 billion. if we add back the cash interest; QCOM's unlevered FCF goes to $3.6 billion while CTL's goes to $5.3 billion.
QCOM's EV is some where between $57 billion and $65 billion (depending on whether you think they will recover $8 billion in back licensing fees from Apple)
CTL's EV is $49.5 bilion. ($47.5 if we take the Economics of the NOls out of the EV and out of FCF)
Same levered FCF, very different Enterprise Values
_______________
QCOM: $3.6 billion in unlevered FCF supporting a $60 billion EV with an existential threat
CTL: $5.3 billion in unlevered FCF supporting a $49.5 billion EV (or $4.5 B supporting $47.5)
Of course these two are pears and oranges. The businesses are not the same, the growth is not the same, the investor bases are not the same.
But free cash flow is cash flow.
CTL's $3.25 billion goes down to $2.5 billion when the NOL is used up (although with Cap ex deductibility this might not be for a while) and QCOM's is projected to goto $4 billion in 2020 by Bernstein and around $1.5 billion by Kerrisdale.
Anyway, if CTL is MUCH MUCH CHEAPER than one of the cheapest most controversial companies in the market today, then it is either VERY VERY TROUBLED or VERY VERY CHEAP.
Even if you back out CTL's NOL driven tax savings, CTL's unlevered FCF yield to EV is 9.5% while QCOM's is 6%
SUM OF THE PARTS
People forgeting that Level 3 is still in there. Centurylink is not the borg. Centurylink didn't turn all that fiber into Borg. YES, LEVEL3 is not growing but neither is ZAYO and look at that valuation...Not all of Level3 is ZAYO like, but alot of it is. BULL AND BEAR SUM OF THE PARTS PRESENTED BELOW
MGMT
THE STORY ON STOREY IS STILL GOOD
YIELD
YOU GET $1 in a dividend and $2 per share in debt reduction on a $13 stock per year. WHATS NOT TO LIKE ABOUT THAT?
DIVIDEND CUT
The lower payout ratio is the right thing to do!
So its not necessarily a signal that the business is tougher
Certainly the debt markets for wireline are not what they were and prudent management would consider ensuring access to the capital markets
I do think they should have paired it with a buyback or tender for some of the freed up capital but
4x leverage is too high. This is not your father's telecom industry
The overhang from the questions about the dividend has been removed
Now its just about the revenues (people will talk) and EBITDA (this is what management is managing to).
RISKS
VOICE AND LOWER SPEED "High speed Internet" Disconnections could continue to pressure the business faster than they can replace it with
RECESSION COULD IMPACT GROWTH IN ENTERPRISE BUSINESS
NEW TECHNOLOGIES SUCH AS SD-WAN WILL PRESSURE LEGACY SER◊ICES SUCH AS MPLS
STOREY HAS HAD HEALTH ISSUES AND HIM STEPPING DOWN WOULD RAISE QUESTIONS
SOME MORE NUMBERS ON CTL
| |
|
|
|
|
|
|
|
| EBITDA |
9,100 |
|
|
|
|
|
|
| Debt |
36061 |
|
|
|
|
|
|
| Net Debt |
35573 |
|
|
|
|
|
|
| Shares |
1081 |
|
|
|
|
|
|
| Free Cash Flow |
3250 |
|
|
|
|
|
|
| Cash Interest |
2075 |
|
|
|
|
|
|
| Unlevered Free Cash Flow |
5325 |
|
|
|
|
|
|
| Stock Price |
12.76 |
|
|
|
|
|
|
| Market Cap |
13,794 |
|
|
|
|
|
|
| Enterprise Value |
49,367 |
|
|
|
|
|
|
| EV to EBITDA |
5.42 |
|
|
|
|
|
|
| Free Cash Flow Yield |
24% |
|
|
|
|
|
|
| Unlevered Free Cash Flow Yield |
11% |
|
|
|
|
|
|
| Dividend Yield |
7.8% |
|
|
|
|
|
|
| Discount Rate |
4% |
|
|
|
|
|
|
| NOL Value |
1977 |
|
|
|
|
|
|
| NOL PV Per share |
$ 1.83 |
|
|
|
|
|
|
|
STRAIGHT EV VALUATION
|
|
|
|
|
|
|
|
| |
Multiple |
|
Net Debt |
Equity |
Per Share |
+ NOL |
|
| |
5 |
45500 |
35573 |
9927 |
$ 9.18 |
$ 11.01 |
|
| |
5.25 |
47775 |
35573 |
12202 |
$ 11.29 |
$ 13.12 |
|
| |
5.5 |
50050 |
35573 |
14477 |
$ 13.39 |
$ 15.22 |
|
| |
6 |
54600 |
35573 |
19027 |
$ 17.60 |
$ 19.43 |
|
| |
6.5 |
59150 |
35573 |
23577 |
$ 21.81 |
$ 23.64 |
|
| |
7 |
63700 |
35573 |
28127 |
$ 26.02 |
$ 27.85 |
|
| |
7.5 |
68250 |
35573 |
32677 |
$ 30.23 |
$ 32.06 |
|
| |
8 |
72800 |
35573 |
37227 |
$ 34.44 |
$ 36.27 |
|
| |
|
|
|
|
|
|
|
|
SUM OF THE PARTS
|
|
EBITDA |
Multiple |
|
|
|
|
| BULL |
Level 3 |
2,900 |
9 |
26,100 |
|
|
|
| |
Century |
6,200 |
5 |
31,000 |
|
|
|
| |
NOL |
|
|
1,977 |
|
|
|
| |
Value |
|
|
59,077 |
|
|
|
| |
Net Debt |
|
|
(35,573) |
|
|
|
| |
Equity |
|
|
23,504 |
|
|
|
| |
Per Share |
|
|
$ 21.74 |
|
|
|
| |
|
|
|
|
|
|
|
| |
|
EBITDA |
Multiple |
|
|
|
|
| BEAR |
Level 3 |
2,900 |
8 |
23,200 |
|
|
|
| |
Legacy Centurylink |
6,200 |
4 |
24,800 |
|
|
|
| |
NOL |
|
|
1,977 |
|
|
|
| |
Value |
|
|
49,977 |
|
|
|
| |
Net Debt |
|
|
(35,573) |
|
|
|
| |
Equity |
|
|
14,404 |
|
|
|
| |
Per Share |
|
|
$ 13.32 |
|
|
|
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
SHAREHOLDER TURNOVER
SPIN-OFF OR SALE OF RESIDENTIAL BUSINESS
INITIATION OF A STOCK BUYBACK
IMPROVING LEVERAGE PROFILE, LOWERED COST OF DEBT, LOWER INTEREST EXPENSE, AND HIGHER MULTIPLE DUE TO LOWER EQUITY RISK
EXECUTION