CenturyLink, Inc.: Smaller but Mightier than AT&T

Shares of CenturyLink, Inc. (NYSE:CTL) jumped 7.88% from an open of $34.50 on May 7 when Q1 2014 earnings was released to a high of $37.22 in the following trading session. Before I get ahead of myself, CenturyLink, Inc. is a $21.31 billion integrated communications company. The company is engaged primarily in providing a range of communications services to its residential, business, government and wholesale customers.

Highlights of Q1 Earnings

  • Core revenues were nearly flat at $4.11 billion compared with a 2.0% year-over-year decline in revenue that was reported in the same quarter of last year. Strategic revenues increase by 5.4% over the year ago quarter
  • CenturyLink added about 66,000 high-speed Internet customers in the first quarter to bring the total number of customers to 6 million
  • The company generated free cash flow of $860 million and it spent $319 million on the purchase and retiring of 10.4 million shares

What is Impressive about Q1 Earnings

CenturyLink reported Q1 2014 results that might ordinarily look unimpressive until you compare it with the result of a smaller competitor (Frontier) and a bigger competitor (AT &T). Many local telecoms companies are having a hard time improving their top and bottom lines; hence, a comparison between CenturyLink and a competitor of equal standing (Frontier) and a much bigger  competitor will show you that the company indeed had a great first quarter.

CenturyLink reported annual revenue growth of 0.6% while Frontier Communications and AT&T reported a 4% and 0.4% drop in overall annual revenues respectively. Moving on to how the companies reduce the rate at which customers leave voice-line plans, the drop in voice-line rate for AT&T is 51% higher than the decline rate for CenturyLink. CenturyLink also reported a 33% lower drop in voice-line rate in comparison to Frontier.

CTL stockchart

The stock chart above shows how CenturyLink compares against AT&T and Frontier Communication based on their price and price to book value. In the last one year, CenturyLink has surpassed AT&T in share price despite the bigger size and valuation of AT&T. However, I am more concerned about the Book Value of CenturyLink, which is lower than that of Frontier and AT&T. The lower Book value shows that the stock of CenturyLink is reasonably priced even though it trades higher than the share price of AT&T.

A Brighter Q2 Ahead

CenturyLink gives optimistic second quarter guidance well above the consensus analysts’ estimates. For instance, the company expects revenue between $4.48 billion and $4.53 billion compared to a $4.49 billion consensus. EPS expectation is between $0.62 and $0.67 compared to the consensus estimate of $0.64. CenturyLink’s optimistic guidance is grounded in solid fundamentals when you consider the first quarter free cash flow of $860 million on net income of $381 million.

How to Trade CTL Options

I would very much like to trade CTL June or July call options on the strength of the current momentum. Nonetheless, an RSI of 77.69 suggests that the stock might be overbought and a pullback might be eminent. However, you should know that CenturyLink is fundamentally sound any pullback will be followed a by a kneejerk that will send the stock higher. I will position myself for gains after the pullback with the CTL Oct 2014 38.000 call (CTL141018C00038000).

— Daily Option Alerts

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