CenturyLink (NYSE:CTL), which is a global telecom and IT provider, has been showing some nice momentum lately. Note that on Friday, the stock price surged 13% to $20.97 per share, and it’s jumping nearly 3% today. In fact, this is not just a temporary blip; CTL stock is up about 40% year-to-date.
And yes, the main catalyst for the latest move was the company’s second-quarter earnings report. The interesting thing was that the bar for the results was not set too high.
Last quarter, CenturyLink’s revenues dropped from $6 billion to $5.9 billion, but were still in line with the consensus estimate. As for the bottom line, CTL’s earnings came in at 27 cents per share, slightly above the consensus estimate.
Yet it was the company’s outlook that was the key for CTL stock. For the full year, CenturyLink expects to report net income of $292 million or 27 cents per share. The Street, on the other hand, was only looking for $69 million, or 6 cents per share.
There were also a variety of notable events during the quarter, showing that the company continues to invest heavily in its network. Specifically, CTL:
- Announced a deal with IBM (NYSE:IBM) to provide a secured, dedicated network for cloud solutions. The network will allow customers to create flexible, low-latency connections.
- Agreed to use Oracle’s (NYSE:ORCL) PartnerNetwork, a platform that enables higher-performance cloud computing services for enterprises.
- Announced a deal with Alphabet’s (NASDAQ:GOOGL,NASDAQ:GOOGL) Google Cloud Partner Interconnect. Under the deal, CTL will provide a service that gives customers the ability to connect to the Google cloud from anywhere.
- Divulged that it was the first Cisco (NASDAQ:CSCO) alliance partner which has received certifications for all cloud and managed services for the Meraki platform. Meraki is a massive WiFi network.
CTL Stock And Level 3
As for CTL’s solid Q2 performance, the critical factor was the impact of the $34 billion acquisition of Level 3, which closed in November. First of all, because of the duplications between the two organizations, CenturyLink has realized significant cost synergies. The synergies raised CTL’s adjusted EBITDA to an annualized run rate of $675 million, up from $215 million in the prior quarter.
But the deal is more than just about financial engineering. Keep in mind that CTL and Level 3 have complementary businesses. Specifically, the deal added 200,000 route miles to CTL’ s fiber network and increased the number of its on-net buildings by 7%.
Additionally, the deal enhanced the competitiveness of CTL’s offerings. As a result, the combined entity now gets 76% of its revenues from business customers — which generally have higher margins and longer relationships — while 65% of its revenue will be obtained from strategic services.
The Bottom Line on CTL Stock
While CTL’s Level 3 deal looks to be excellent, there are still some nagging issues. Its debt load, at $36.9 billion, is enormous. Even though its EBITDA is decent, it could be pressured by rising interest rates. Also, CTL could have difficulty maintaining its dividend yield, which currently stands at a hefty 11.7%.
Besides, the company continues to suffer from an erosion of its top line. The fact is that its industry is intensely competitive, and there are few signs that the competition will let up anytime soon. It also does not help that CTL is essentially in a commoditized business and has little pricing power.
And finally, the valuation of CTL stock is not necessarily cheap, either. Consider that its forward price-earnings ratio stands at 18.
In other words, for those investors considering CTL stock, the best approach is probably to stay away for now.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.