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CenturyLink Heads Toward Modest Growth

While margins are likely to come under pressure as the top line stabilizes, cash flow should remain sound for the foreseeable future.

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 CenturyLink's (CTL) management believes that the four growth initiatives it has put in place--broadband, fiber to the tower, television service, and cloud/hosting services--provide a platform to expand the business. As such, additional transformative acquisitions aren't needed and are probably off the table for the foreseeable future. We believe CenturyLink will succeed in stabilizing its top line, but we also expect margin pressure will cause cash flow to decline modestly over time. If the company holds pat with the assets it has today, investor attention is likely to shift to shareholder returns in 2013 and beyond. We expect the firm will favor reducing leverage over increasing the dividend or buying back large amounts of stock.

Stabilizing Revenue Is a Key Priority
CenturyLink has shifted its revenue mix heavily toward enterprise services via acquisition over the past couple of years. This area provides stronger growth potential than the legacy consumer and wholesale businesses and will also benefit from investment in managed hosting services. Enterprise growth, coupled with diminishing impact from declining legacy services, should provide top-line stability. We believe CenturyLink will be able to begin posting modest revenue growth over the next couple of years.

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Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.