CENTURYLINK INC CTL
February 14, 2019 - 10:15pm EST by
sidhardt1105
2019 2020
Price: 12.76 EPS 0 0
Shares Out. (in M): 1,081 P/E 0 0
Market Cap (in $M): 13,800 P/FCF 0 0
Net Debt (in $M): 35,573 EBIT 0 0
TEV ($): 49,367 TEV/EBIT 0 0

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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

 

 

 

1       sort by    

    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

     

     

     

    Messages


    SubjectRe: Where I agree and Disagree
    Entry02/15/2019 11:55 AM
    Membersidhardt1105

    I wanted to get the idea out right away.  I didn't have an idea obligation for many months, but I thought the opportunity is now so didn't really have time to have a fulsome discussion of the nuances of the business.  We have a forum now where this can be debated in a what is a volatile stock.  I think that is useful.

    Many businesses have parts that are in decline and parts that are growing. 

    The declining aspects of Centrueylink's business are well known. 

    Cost cutting and business process improvement opportunities create real value and they are in abundance here as demonstarted by Management's $850 million transformation plan over three years.  CTL has growth opportunities in backhaul for 5G, providing new telecomunications technology solutions for enterprises, CAF initiatives.  Right now they are swimming upstream to be sure given the legacy voice and DSL businesses.  But these will burn out over time.  I don't think Legacy CTL is FTR but this last night it was priced the same as FTR (4x EBITDA is pretty close to 3.8x EBITDA for FTR through the market price of the bonds and FTR bond prices have implied costs for coupon deferrals in BK, consultant fees in BK, and the inability to fully invest the right amount of Capex ex). 

    Rarely do you get management doing the right thing.  And the market punishing the stock for management doing the right thing was wrong in my view.

    I don't have any opinion on QCOM but its not necessarily growing.  There's a vocal voice that its about to compress.  And for certain, QTL has been shrinking and they lost the Apple market share in chips.  SO not all of QCOM has been or will necessarily grow.  That's the only comparison I was trying to make which I think is worth considering.

     

     

     

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