CenturyLink a Bargain for Savvy Investors

Matthew Dolgin: After doing a deeper dive into CenturyLink recently, we feel even more strongly that the market is mispricing its stock.

Accelerating sales declines, a large debt load, and fears about another dividend cut may be behind the dismal stock performance over the last year, but those concerns are overblown in our view.

We project sales declines to continue throughout the next five years, driven by technological advances and price deflation for firms running legacy telecom networks, but the more important thing is that CenturyLink has continued growing profits and generating significant free cash flow despite those headwinds. We think the firm can continue expanding profit margins and generating about $3 billion in free cash in each of the next five years.

With that $3 billion, we expect CenturyLink to maintain the current dividend, which requires only about $1 billion, and to continue paying down debt with most of the rest. Consequently, we believe the firm is in good position to meet all its debt obligations, and we don't think it will have to roll over maturing debt until at least 2022.

Although we don’t think CenturyLink is protected by a moat, it does own a first-rate global network that the biggest organizations in the world rely on. That network distinguishes CenturyLink from its regional consumer telecom peers that have run into financial difficulties recently. With 75% of its revenue coming from business customers, a network that is critical for global communications, a path to sustain $3 billion in free cash flow annually, and constant improvement in its debt position, CenturyLink should be trading at higher than 4 times free cash flow, and investors can receive an 8% dividend while the market figures that out.