We have upgraded our long-term rating on CenturyLink Inc. (CTL) to Outperform from Neutral on the back of synergies expected from the Embarq, Qwest and Savvis acquisitions. We believe the three acquisitions would generate annual synergies of $1 billion when fully realized.
Although the acquisitions and mergers would increase the company’s operating costs and debt, we believe these would provide excess synergies going forward and boost the company’s competitive position against its two major rivals –– AT&T Inc. (T) and Verizon Communications Inc. (VZ).
CenturyLink expects the Embarq purchase to produce annual synergies of $375 million by the end of this year. The company believes the Qwest and Savvis acquisitions will significantly enhance CenturyLink's position as a global communications leader and strengthen its ability to drive long-term shareholder value.
The Qwest acquisition would generate annual costs and capital expenditures synergies of approximately $575 million and $50 million, respectively, over three to five years. Further, the Savvis buyout marks CenturyLink’s entry into the cloud computing business, which is growing by leaps and bounds. The purchase would improve the company’s revenue, EBITDA and free cash flow, and would generate cost synergies of roughly $70 million.
With respect to falling fixed voice access lines, the third-largest U.S. landline operator is working on a number of initiatives to curtail access line losses. The company is bundling integrated services, promoting new services such as video, gaining new wireless spectrum from Federal Communications Commission and improving its infrastructure. These should work in favor of the company’s future revenue and earnings.
Furthermore, CenturyLink’s sustained focus on investing in four areas – broadband expansion, fiber cells, cloud computing and Prism TV – will serve as major catalysts for revenue growth over the next few years. Additionally, the company offers higher returns to its shareholders through healthy dividend payouts, backed by strong free cash flow, inspiring our optimism on the stock.
CenturyLink also posted decent third quarter results. Earnings per share fell drastically from the year ago, but were on par with the the Zacks Consensus Estimate. But revenue more than doubled during the quarter owing to the Qwest and Savvis acquisitions.
For the short term, the stock retains a Strong Buy rating with the Zacks #1 Rank.
CENTURYLINK INC (CTL): Free Stock Analysis Report
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