On Mar 28, Zacks Investment Research downgraded CenturyLink, Inc. CTL, the third largest wireline service provider in the U.S., by a notch to a Zacks Rank #3 (Hold).
CenturyLink’s core local phone business has slowed significantly, which is evident from the steady decline in access lines. This is primarily due to the substitution of traditional wireline telephone services by wireless and other competitive offerings and lower long distance minutes of use.
In addition to large telecommunications providers, the company faces intense competition from cable TV operators and other wireless companies which aggressively offer traditional voice service over their networks. Improvements in the quality of VoIP services have enabled cable TV, Internet, and telephone companies to offer services at attractive price points.
In addition, the company continues to experience a decline in subsidy payments received under the Federal Universal Service Fund or USF, representing an important source of its network access revenue. The FCC had reformed its USF and inter-carrier compensation rules, underscoring its efforts to expand high-speed Internet services to rural areas over the six years spanning 2012 to 2018. It has thus reduced access and compensation rates charged by CenturyLink, resulting in a significant decline in the company’s access revenues.
However, CenturyLink’s restructured operating segments should help the company gain traction and achieve stronger top-line results, revenue growth from inorganic initiatives and operating efficiency over the long term. Further, CenturyLink’s broadband expansion goal should help it to gain on the back of growing demand.
Moreover, the company, over the last few years, has been witnessing a lower rate of revenue decline. In 2014, the company’s core revenues recorded a narrower decline of 0.6% compared with a 1.3% annual decline in 2013. In 2015, the company expects this trend to continue, buoyed by strategic revenues, improvement in broadband and Prism TV sales as well as high bandwidth data and hosting services.
Further, CenturyLink continues to expand its data centers. The company has recently opened a new data center in the Asia-Pacific region in the ongoing quarter. Notably, the company’s public cloud platform, CenturyLink Cloud, is already available in nations like Germany, United Sates, United Kingdom and Canada. Thus, we believe the expansion of the public cloud platform to Singapore should allow the company to tap opportunities in the enterprise business and significantly promote its cloud products.
Stocks to Consider
Investors interested in the same sector may consider stocks like InterDigital, Inc. IDCC, Juniper Networks, Inc. JNPR and ViaSat Inc. VSAT. All three stocks currently sport a Zacks Rank #1 (Strong Buy).
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