We are downgrading our recommendation on CenturyLink (CTL) to Underperform. First quarter earnings surpassed the Zacks Consensus Estimate aided by synergies from Embarq but fell year over year.
Although CenturyLink continues to grow its broadband customer base and associated revenues, it remains challenged by the decline in fixed voice access lines. CenturyLink's core local phone business has slowed significantly, which is evident from the consistent decline in access lines on an organic basis. Moreover, the company faces intense competition from cable TV operators.
We also remain cautious regarding the carrier's high debt exposure, which adds a degree of financial risk. Our price target of $36
is based on 13.3x our earnings estimate for 2011.
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