CenturyLink (CTL) Down 33.1% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for CenturyLink (NYSE:CTL). Shares have lost about 33.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is CenturyLink due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

CenturyLink Q4 Earnings Match Estimates, Revenues Beat

CenturyLink reported decent fourth-quarter 2019 results wherein the top line surpassed the Zacks Consensus Estimate. The Monroe, LA-based communications company made notable progress in 2019 with its fiber-based investments and transformation initiatives.

Net Income

Net income for the December quarter was $223 million or 21 cents per share against net loss of $2,412 million or loss of $2.26 per share in the year-ago quarter. The improvement was driven by operating income and lower interest expense. For 2019, net loss was $5,269 million or loss of $4.92 per share compared with net loss of $1,733 million or loss of $1.63 per share in 2018.

Fourth-quarter net income (excluding integration and transformation costs, and special items) came in at $352 million or 33 cents per share compared with $394 million or 37 cents per share in the prior-year quarter. The bottom line matched the Zacks Consensus Estimate.

Revenues

Quarterly aggregate operating revenues declined 3.6% year over year to $5,570 million, primarily due to lower sales at Wholesale and Consumer segment. This compares to declines of 3.6% in the third quarter, 5.5% in the second quarter and 5% in the first quarter of 2019. The result reflects tough year-over-year comparison as the company implemented guardrails to drive revenues during the course of 2018. The top line surpassed the consensus estimate of $5,544 million. For 2019, revenues decreased 4.4% year over year to $22,401 million.

By business segment, Small and Medium business revenues decreased 3.3% year over year to $731 million, as revenue pressures from legacy services more than offset growth from new services and expansion in addressable market. Revenues from Wholesale fell 7.4% year over year to $994 million due to ongoing industry consolidation and technology evolution.

Consumer revenues decreased to $1,386 million from $1,467 million in the year-ago quarter. Within this business, 2019 was somewhat of a transitional year that underscored two areas — to focus on fiber as the premier last-mile access solution outside of CenturyLink’s CAF II market and the ramp down in its linear TV product.

Revenues from International and Global Accounts decreased 2.1% year over year to $904 million. Enterprise revenues remained stable year over year at $1,555 million, backed by installs from sales earlier in the year as well as strength in the federal government channel.

Other Quarterly Details

Total operating expenses reduced by 38% year over year to $4,723 million, primarily due to absence of goodwill impairment which amounted to $2,726 million in fourth-quarter 2018, and lower cost of services and products. Operating income was $847 million against operating loss of $1,841 million in the prior-year quarter, supported by lower operating expenses. Adjusted EBITDA slipped to $2,105 million from $2,189 million in the year-ago quarter. Adjusted EBITDA margin was 37.8% compared with 37.9% a year ago. Capital expenditures were $940 million compared with $915 million in the prior-year quarter.

Cash Flow & Liquidity

In 2019, CenturyLink generated $6,680 million of net cash from operating activities compared with $7,032 million in 2018. For the same period, free cash flow (excluding cash integration and transformation costs, and special items) was $3,276 million compared with $4,215 million in 2018. As of Dec 31, 2019, the company had $1,690 million in cash and equivalents with $32,394 million of long-term debt compared with the respective tallies of $488 million and $35,409 million a year ago.

2020 Guidance

CenturyLink has provided its financial targets for 2020. It expects adjusted EBITDA of $9.0-$9.2 billion. While free cash flow is expected in the range of $3.1-$3.4 billion, net cash interest is estimated between $1.75 billion and $1.80 billion. Capital expenditures are anticipated between $3.6 billion and $3.9 billion, and depreciation and amortization are expected in the range of $4.7-$4.9 billion. Effective income tax rate is likely to be around 28%.

Going Forward

CenturyLink continues to execute strategy around four key areas — investing in growth through product and network expansions, delivering an enhanced customer experience across business, transforming operations to improve efficiency and employee experience, and deleveraging to strengthen its balance sheet.

The company is well-positioned to support customers as they shift to next-generation hybrid platforms to meet their networking needs. It is likely to capitalize opportunity for revenue growth from market dynamics such as growth in security, IoT, Big Data, 5G, AI and the demand for edge computing.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, CenturyLink has a strong Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, CenturyLink has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.