Centurylink (CTL): Longleaf Partners Loves This Telecom Company

Centurylink Inc (NYSE: CTL) is a $13.34-marker telecommunications company, headquartered in Monroe, Louisiana. Longleaf Partners Fund, a suite of mutual funds and UCITS funds managed by Southeastern Asset Management, is bullish on Centurylink. In its Q4 investor letter, the fund discussed the telecom company, calling it an “overweight position” given its deep discount and the quality of both its management team and its fiber assets. Let’s take a look at Longleaf’s comments:

CenturyLink (2%, -0.65%, -26%, -3.25%), the telecommunications company, was a fourth quarter detractor, but ended slightly up for the year after substantial gains earlier in 2018. The stock declined after third-quarter revenues came in below expectations, but our appraisal rose with 7% yearly EBITDA growth as higher margin revenue within the Enterprise segment increased and consolidated free cash flow (FCF) nearly doubled year-over-year.

CenturyLink’s FCF is more than $3.00 per share and growing, yet the stock trades around $15. Revenues declined in part because the company wisely exited unprofitable business lines, prioritizing capital efficiency and deleveraging over top line growth. The dividend moved back up to a mid-teens yield with minimal chance of any cut. We expect consolidated EBITDA to grow by a lowsingle digits percentage next year, but within that number we believe high-value Enterprise fiber revenues and cash flows will grow above that, making up for the lowquality legacy landline run off.

CenturyLink remains an overweight position given its deep discount and the quality of both its management team, led by CEO Jeff Storey, and its fiber assets, which we believe are of high strategic value to numerous infrastructure investors.

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Shares of Centurylink Inc (NYSE: CTL) are down around 20% year-to-date. Last month, shares fell over 13% after the company reported fourth-quarter 2018 results which disappointed investors. The company reported a loss for the quarter, a year-over-year decline in revenues and cut its annual dividend rate.

Last month, in a 13D filing, Southeastern Asset Management said that the dividend cut was not the best way to address balance sheet concerns. They want the company to make some other changes. Southeastern believes that the company’s fiber assets are extremely undervalued in the stock market, especially considering the metrics which entities such as infrastructure funds and cable companies have paid in recent private transactions for fiber assets. Therefore, the investor intends to talk to such infrastructure funds, to cable companies, and to any other verticals who are heavy users of fiber networks but may want to own such networks or parts of them.

Closing at $12.34 on Monday, the Centurylink stock has a consensus average rating of ‘HOLD’ and a consensus average price target of $14.07, according to analysts polled by FactSet.

Meanwhile, Centurylink Inc (NYSE: CTL) isn’t a very popular stock among hedge funds tracked by Insider Monkey. Our database shows that, at the end of the third quarter of 2018, only 24 funds were holding the stock.

Disclosure: none