CTL - CenturyLink

[petec]

FWIW Guggenheim downgraded today with a PT of $11, saying the company is poorly positioned, that price pressure is taking hold in enterprise, and that a dividend cut is a matter of when not if.

[walkie518]

FWIW Guggenheim downgraded today with a PT of $11, saying the company is poorly positioned, that price pressure is taking hold in enterprise, and that a dividend cut is a matter of when not if.

I wonder how much of the negativity derives from the 911 outage?

 

I circled on previous outages and fines, it could be a multiple over what was previously paid, but my guess is (as awful as it sounds) this outage may result in a slap on the wrist; however, the size of the liability is a question mark so investors may be dumping for fear that it is much larger than the market anticipates? 

 

how much pressure could there be on the enterprise business? 

 

do you know how they justify the divi cut?  CTL had some balance sheet erosion over the last few years, but with Level 3 the firm is on better footing (though not good enough for Patel to stay? as a side, anyone know where he went?)

 

$3.9B - $3.1B (Capex) = $800m

 

CTL will borrow the rest to cover the $1.5B of dividends? 

 

Gugg is saying borrowing $700m is too much to bear until debt is further reduced? 

 

Funny enough, it might be cheaper for the company to borrow and buyback stock than it would be to pay down debt...cost of capital would decline faster...

 

[petec]

FWIW Guggenheim downgraded today with a PT of $11, saying the company is poorly positioned, that price pressure is taking hold in enterprise, and that a dividend cut is a matter of when not if.

I wonder how much of the negativity derives from the 911 outage?

 

I circled on previous outages and fines, it could be a multiple over what was previously paid, but my guess is (as awful as it sounds) this outage may result in a slap on the wrist; however, the size of the liability is a question mark so investors may be dumping for fear that it is much larger than the market anticipates? 

 

how much pressure could there be on the enterprise business? 

 

do you know how they justify the divi cut?  CTL had some balance sheet erosion over the last few years, but with Level 3 the firm is on better footing (though not good enough for Patel to stay? as a side, anyone know where he went?)

 

$3.9B - $3.1B (Capex) = $800m

 

CTL will borrow the rest to cover the $1.5B of dividends? 

 

Gugg is saying borrowing $700m is too much to bear until debt is further reduced? 

 

Funny enough, it might be cheaper for the company to borrow and buyback stock than it would be to pay down debt...cost of capital would decline faster...

 

I don't have the piece so I don't know how the justify the divi cut but if they fear price erosion then presumably they see revenue decline as structural in which case cutting the divi is the only way to service debt.

 

Patel went to T-Mobile.

 

Sustainable FCF is likely around $3bn at the moment - more than sufficient to cover the dividend (which is $2.1bn). That's not the issue. And if they are successful with their cost transformation drive (as distinct from synergies) then the FCF upside is huge - a 10% cut in costs would add nearly 50% to FCF, even without revenue growth. The problem is that is the company is operationally and financially levered so if they can't cut costs to offset revenue declines then FCF drops dramatically. That's what the market is freaked about, and any note saying it's poorly positioned and is seeing pricing pressure is going to worsen concerns.

 

Equally if they can keep cutting costs until they can turn revenues around, then this thing is wildly undervalued. Absolutely no sustainable growth is priced in at this point.

[walkie518]

FWIW Guggenheim downgraded today with a PT of $11, saying the company is poorly positioned, that price pressure is taking hold in enterprise, and that a dividend cut is a matter of when not if.

I wonder how much of the negativity derives from the 911 outage?

 

I circled on previous outages and fines, it could be a multiple over what was previously paid, but my guess is (as awful as it sounds) this outage may result in a slap on the wrist; however, the size of the liability is a question mark so investors may be dumping for fear that it is much larger than the market anticipates? 

 

how much pressure could there be on the enterprise business? 

 

do you know how they justify the divi cut?  CTL had some balance sheet erosion over the last few years, but with Level 3 the firm is on better footing (though not good enough for Patel to stay? as a side, anyone know where he went?)

 

$3.9B - $3.1B (Capex) = $800m

 

CTL will borrow the rest to cover the $1.5B of dividends? 

 

Gugg is saying borrowing $700m is too much to bear until debt is further reduced? 

 

Funny enough, it might be cheaper for the company to borrow and buyback stock than it would be to pay down debt...cost of capital would decline faster...

 

I don't have the piece so I don't know how the justify the divi cut but if they fear price erosion then presumably they see revenue decline as structural in which case cutting the divi is the only way to service debt.

 

Patel went to T-Mobile.

 

Sustainable FCF is likely around $3bn at the moment - more than sufficient to cover the dividend (which is $2.1bn). That's not the issue. And if they are successful with their cost transformation drive (as distinct from synergies) then the FCF upside is huge - a 10% cut in costs would add nearly 50% to FCF, even without revenue growth. The problem is that is the company is operationally and financially levered so if they can't cut costs to offset revenue declines then FCF drops dramatically. That's what the market is freaked about, and any note saying it's poorly positioned and is seeing pricing pressure is going to worsen concerns.

 

Equally if they can keep cutting costs until they can turn revenues around, then this thing is wildly undervalued. Absolutely no sustainable growth is priced in at this point.

 

I'm starting to think the analyst might have been looking at the wrong metrics?

 

Humor me for a second, last 9 months, $5B of cash from ops. 

 

$293m for share comp, doubtful accounts, and debt ext cost. 

 

capex marked at $2.26B

 

dividend marked at $1.7B

 

for the first nine months of the year, CTL had $747m after paying everything above...this might give $1B of room before adding any debt capacity for the full year

 

maybe the Embarq debt is the low hanging fruit...I see $138m of mortgages @ 7.125-8.37% due 2023-25, $1.485b senior notes due 2036 @ 7.995%, and a $150m "other" debt with @ 9% due this year.  These items, while not the largest, are certainly the most expensive (though still less expensive than buying back stock) ...

 

what a pickle

[petec]

I just think there’s so much debt no-one is looking at FCFE (apart from us).

 

2018 FCF isn’t the issue. There’s plenty and they’re paying into the pension and buying back debt this year.

 

In 2019 capex is guided to rise back to 16% of revenues so all else equal FCF will fall. All else may not be equal. On the positive side they are building a plan to reduce costs dramatically, which as discussed could boost FCF by a lot. On the negative side revenues are falling and both operating and financial leverage are high so a relatively small drop in profitable revenues (if that happens) would hurt FCF a lot.

 

Right now I’m biased to cost cuts and potential upside. There’s little in the price for anything going right. But I can see why the market’s stressed: there’s so much debt that the equity could be really hurt if anything goes badly wrong.

[petec]

Well this is fun. 21.5% free cash yield now using consensus 2019.

[gfp]

Does this company repurchase stock in any meaningful way?

 

Well this is fun. 21.5% free cash yield now using consensus 2019.

[Valuehalla]

No repurchases right now.

But CTL did repurchases additionally to the divi before the acquisition of Level 3 was made.

[txvalue]

I have obviously been a critic of CTL's assets and operations and I think it's difficult to forecast FCF here past 2019.  Everyone is banking on cost cuts but I don't know many examples of companies with so-so operations reducing costs significantly while improving products/services.  This is not a Bank of Americaesque low hanging fruit expense cutting story.

 

Legacy CTL revenue is likely to decline low to mid single digits moving forward and L3 which was looked at to be the growth engine has had flat revenues. There are many other companies better positioned in the space (cable, wireless, even fiber providers that don't have all of the legacy things attached to them).

 

They can trim costs further but with the debt pile and dividend commitment I think things will be more difficult than they are telegraphing to the market.  Add in the downgrades piling on, executive turnover and major shareholders exiting and you wonder if they wouldn't be best served by ripping off the dividend band-aid now.

 

 

 

 

[petec]

you wonder if they wouldn't be best served by ripping off the dividend band-aid now.

 

Quite. I am a little more optimistic than you on cost cuts - I think better products cost less for these guys - but they need to cut the dividend and opportunistically repo debt and stock.

[LightWhale]

Does this company repurchase stock in any meaningful way?

 

 

They don't have the CF buffer for that. The current annual dividend is equal to repurchasing 15% of the company every year. Financially, at 20% FCF, it would make sense to eliminate the dividend and buy back stock, but that could affect reputation vs. clients and employees, igniting severe economic consequences.

 

The x5 FCF multiple stems from heightened risk. If management cannot give revenue guidance, it's hard to get comfortable with future EBITDA & the dividend. Plus they will need to roll some of the bonds in a year, while their debt/EBITDA is deteriorating. But if one ignores capital allocation entirely, the risk reward is favourable - it trades like a melting ice cube despite a worst case scenario of 3% annual revenue contraction in an industry which is relatively recession resistant.       

[petec]

Debt/ebitda is improving.

[Valuehalla]

CTL development in 2018:

 

                                        Q1                              Q2                                  Q3

 

Revenue                          5,945 B                        5,902 B                          5,818 B

 

EBITDA                            2,074 B                          2,111 B                          2,228 B

 

adj. EBITDA                      2,181 B                        2,271 B                          2,287 B                       

 

EBITDA Margin                  34,9 %                          38,5 %                          39,3 %

 

Lomg Term Dept                36,94 B                          36,78 B                          35,749 B

 

NetDept to adj EBITDA          x 4.3                            x 4.2                            x 4.1

 

Operat. CF                        1,667 B                          1,58 B                            1,787 B

 

FCF                                    852 M                            811 M                            1,103 B

 

EPS                                    0,11                              0,27                              0,25

 

Markt Cap

(at day figures came out)      19,464 B                      20,02 B                            22,08 B

 

Market Cap today: 20,43 B

 

Market Cap today 15,2 B

[walkie518]

CTL development in 2018:

 

                                        Q1                              Q2                                  Q3

 

Revenue                          5,945 B                        5,902 B                          5,818 B

 

EBITDA                            2,074 B                          2,111 B                          2,228 B

 

adj. EBITDA                      2,181 B                        2,271 B                          2,287 B                       

 

EBITDA Margin                  34,9 %                          38,5 %                          39,3 %

 

Lomg Term Dept                36,94 B                          36,78 B                          35,749 B

 

NetDept to adj EBITDA          x 4.3                            x 4.2                            x 4.1

 

Operat. CF                        1,667 B                          1,58 B                            1,787 B

 

FCF                                    852 M                            811 M                            1,103 B

 

EPS                                    0,11                              0,27                              0,25

 

Markt Cap

(at day figures came out)      19,464 B                      20,02 B                            22,08 B

 

Market Cap today: 20,43 B

 

Market Cap today 15,2 B

 

adding up the first 3 quarters, you get $2766 FCF with a $3.1B target...wonder how much rev deterioration is baked into the current price?  20%?

[LightWhale]

Debt/ebitda is improving.

 

Sorry for a late response, and also for the ambiguous claim. The debt ratio has improved over the last quarters, but deteriorated against the merger projections, benchmarked at 3.7x (including synergies) as the start of a deleveraging trajectory. Plus there were talks about industry consolidation and improved pricing. Instead, two years after those projections, CTL is at 4.1x with synergies almost fully captured, and the price curve is downward sloping with cable eating away parts of the fibre pie. As operators, this leaves almost no room for execution mistakes (e.g., the christmas shutdown). On the other hand, as shareholders, the stock price leaves a lot of room for positive surprises.

 

BTW, in Moody's report from December, adjusted EBITDA is strangely at 4.6x. Can any of you guys explain this figure?

 

Looking forward to Wednesday's results and call.

[tylerdurden]

Synergies are not “almost fully captured”. They are in transformation phase for the merger which should still provide material synergies going forward.

[LightWhale]

I agree but was referring to projected synergies, as anything else has not been pegged and is just nebulous. what's your number?

 

The bears (e.g., City) forecast 2020 EBITDA of 8.6-8.7B with ~2% revs compression down the road. As long as CTL can maintain EBITDA above 9B, which i think is likely, this investment should turn out well. If they give guidance on cost savings from transformation on tomorrow's call, and it's higher than 250m in two years, that should relieve the pressure from revenue decline.

[petec]

The “transformation” (as distinct from the merger synergies) seems to go deeper than putting two companies together. It’s more about simplifying and digitalising so customers don’t call you etc. If they get that right it could be a big number. $250m is less than 2% of the cost base. I’m betting they can exceed that.

 

The more existential question is whether they’re losing profitable or unprofitable revenues. If it’s only the latter then concerns are unfounded. But I think there’s been a realisation that some of the 500-700bps ebitda margin expansion they’ve been taking about might come via cutting unprofitable revenues rather than just by cutting costs. The implications for absolute ebitda and FCF are obviously very different. I suspect some of the spoke earlier this year was people pencilling in a low 40% ebitda margin on flat revenues and some of the drop has been people reducing that revenue assumption.

 

I think they’re going to surprise people on costs and margins over the next few years. But I don’t have a good handle on revenues. I get that there are unprofitable revenues to cut and it’s a competitive industry, but my gut says that with a backdrop of booming data demand in a newly consolidated industry, it shouldn’t be *this* hard.

[petec]

Finally some common sense. Dividend halved to $1/share.

[walkie518]

Finally some common sense. Dividend halved to $1/share.

this is the largest negative though likely a long-term positive should they speed up leverage unwind

 

at the same time, stock is going to take a real hit tomorrow, down 10% AH

 

$4B FCF sounds pretty good though on a $16B mcap

 

I would think that the recent decline, however, priced in the divi cut...

[Valuehalla]

Sold out my total position right now & taking a loss, bc

 

1) totally lost trust in the management:

 

Quote CFO Neel Dev from Dec 2018 concerning the divi:

So we're comfortable with the payout ratio. So if you look at our payout ratio this year it was in the mid-50s and we did have some one-time benefits this year from lower capital spending from tax refunds. We net off making a $500 million contribution to the pension fund. So if you look at all that and normalize our payout ratios, we’re in the low 70s any reasonable expectations for us for the next few years you still see very good dividend coverage. So we’re comfortable with the payout ratio.

 

Now, more than half of the divi is surprisingly canceled

 

and

 

2) the Q4 figures by itself and the outlook 2019 is disappointing to me.

 

FCF bottomline outlook for 2019 even lowered to 3.1B, from 3.15B outlook already last year for 2018.

Revenue shrinking further, no increase in FCF or EBITDA in sight for 2019.

[petec]

If it opens where it currently is in the aftermarket I’ll be adding tomorrow. Faster deleverage reduces risk. FCF yield is over 20%. An additional $1bn of cost-outs have been announced. FCF guide looks good to me although I don’t know how much the new cost outs contribute to it. If the new cost outs contribute to FCF growth over the next 3 years (rather than offsetting falling revenue) then the FCF yield is going to over 30%. Big if.

 

Annoyingly the aftermarket loss has already been halved from 15% to 7.5%. Will be interesting to see where it opens tomorrow.

[peridotcapital]

The intrinsic value of the business is not impacted by the dividend payout ratio. Accordingly, I commend management for making the right call. If the market is unwilling to give you credit for the dividend coverage you are offering (a 15% yield proves it was not), you are only hurting investors by sticking to it. While some folks will sell on this news, the stock will probably be above today's close in the coming months. With $3 of free cash flow per share, the stock is not going to stay at $13 with a mid 30% payout ratio.

 

FD: Buying CTL in the after hours session.

[tylerdurden]

This could be the right call for the company but no question erodes management's credibility after constantly telling dividend is safe etc etc. over the quarters. There is chicken and egg issue here. The stock was pressured because of the dividend cut rumors and so the yield was that high obviously so the other argument is if they had stuck to their guns, the stock price could have increased and normalized the yield. This stock was more than 24 bucks only last august so raising the surrender flag by management was perhaps premature just because the share was getting killed in the short run. Not sure why they are not buying back shares with this share price now. If they'll do extra investments to stabilize the revenues I am ok with this decision but overall it certainly left bad taste after making all those empty promises about the dividend.

 

Hey Valuehalla, I have been reading your comments for a long time about CTL on this board so I just wanted to share my thoughts about selling now. I know it is frustrating and i certainly have my doubts for the management's honesty and/or competence about capital allocation strategy but i think it is the worst time to sell this stock. Why don't you take a deep breath and give them a couple of more months or quarters if you can? This is highly likely an overreaction to the dividend cut news. Shouldn't impact the intrinsic value of the company at all... Anyways just don"t want you to regret this.

[serendibz]

The intrinsic value of the business is not impacted by the dividend payout ratio. Accordingly, I commend management for making the right call. If the market is unwilling to give you credit for the dividend coverage you are offering (a 15% yield proves it was not), you are only hurting investors by sticking to it. While some folks will sell on this news, the stock will probably be above today's close in the coming months. With $3 of free cash flow per share, the stock is not going to stay at $13 with a mid 30% payout ratio.

 

FD: Buying CTL in the after hours session.

 

 

How do you get the $3 FCF number? Their capex is almost equal to their depreciation.