Why Is CenturyLink (CTL) Down 3.5% Since Last Earnings Report?

A month has gone by since the last earnings report for CenturyLink (CTL). Shares have lost about 3.5% 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 the most recent earnings report in order to get a better handle on the important drivers.

CenturyLink Q1 Earnings Beat, Revenues Decline Y/Y

CenturyLink reported mixed first-quarter 2019 financial results, wherein the top line missed the Zacks Consensus Estimate but the bottom line surpassed the same.

Net Loss

Net loss for the quarter was $6,165 million or loss of $5.77 per share against net income of $115 million or 11 cents per share in the year-ago quarter. The year-over-year deterioration was primarily due to lower revenues and higher operating expenses.

Net income (excluding integration and transformation costs, and special Items) came in at $360 million or 34 cents per share compared with $262 million or 25 cents per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 7 cents.

Revenues

Quarterly operating revenues decreased 5% year over year to $5,647 million as the company had contract rerates from some of its large customers mainly in wholesale and global accounts. The top line lagged the consensus estimate of $5,728 million.

By Business unit, Small & Medium business revenues were $755 million while Enterprise revenues totaled $1,523 million. Wholesale and International & Global Accounts generated $1,037 million and $891 million, respectively. Consumer revenues were $1,441 million compared with $1,569 million in the first quarter of 2018 due to headwinds related to retail video and voice attrition, partly offset by growth in broadband revenues.

Other Details

Total operating expenses increased 114.6% year over year to $11,146 million on account of goodwill impairment. Operating loss was $5,499 million against income of $750 million in the prior-year quarter, mainly due to higher operating expenses. Adjusted EBITDA rose to $2,228 million from $2,074 million. Adjusted EBITDA margin was 39.5% compared with 34.9% a year ago, driven by cost transformation initiatives.

Cash Flow and Liquidity

During the first quarter, CenturyLink generated $1,182 million of net cash from operations compared with $1,667 million in the year-ago period. For the same period, free cash flow (excluding cash integration and transformation costs) was $315 million compared with $941 million in the prior-year period. As of Mar 31, 2019, the communications company had $441 million in cash and equivalents with $34,858 million of long-term debt.

2019 Outlook

Owing to a good start in capturing synergy and cost transformation savings, CenturyLink has reiterated all of its full-year 2019 financial outlook measures. It continues to expect adjusted EBITDA of $9.00-$9.20 billion. While free cash flow is expected in the range of $3.10-$3.40 billion, free cash flow after dividends is projected between $2.025 billion and $2.325 billion. Outlook for capital expenditures is anticipated between $3.50 billion and $3.80 billion, and depreciation (and amortization) is expected to be $4.90-$5.10 billion. Effective income tax rate is expected to be about 25%.

Going Forward

CenturyLink aims to transform its business operations through product evolution and digitizing of customer interactions. It is working toward generating healthy revenue growth in its business markets. The company sees the scale of its global assets alongside innovative product portfolio to be accretive to earnings. CenturyLink is also working with customers to enable their 5G roadmaps while extending its fiber footprint.

Furthermore, CenturyLink remains committed to its de-leveraging objectives and reaching the target leverage range of 2.75x-3.25x (net debt to adjusted EBITDA) in the next three years owing to strong business fundamentals. The company intends to return significant value to shareholders while investing in revenues and EBITDA growth drivers.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 11.84% due to these changes.

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 quintile 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 upward for the stock, and the magnitude of these revisions looks promising. Notably, CenturyLink has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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