Jefferies Sees Secular Challenges Unlikely To Abate, Downgrades CenturyLink To Underperform

Jefferies’ Mike McCormack downgraded the rating for Centurylink Inc CTL from Hold to Underperform, while reducing the price target from $25 to $24, mentioning that the secular challenges facing the company are unlikely to abate in the near future.

Centurylink’s shares are up 28 percent year-to-date, boosted by a strong 4Q, in-line guidance and insatiable demand for yield. “However, market skittishness appears to be stabilizing and we would expect CTL to underperform in a more risk-on environment, particularly given secular challenges,” analyst Mike McCormack said.

Secular Challenges

McCormack believes that investors looking for signs of revenue stabilization at Centurylink are likely to be disappointed. In the Consumer segment, positive broadband adds appear unlikely, given cable competition. In the Business segment, declines are expected to continue due to tougher comps in 1H16. Centurylink’s Hosting segment is expected to continue underperforming.

An analysis of the company’s cost reveals that cash expenses ex-synergies increased each year, except 2015, due to a onetime benefit, despite the ongoing revenue declines. The company’s guidance of a continuation of this trend in 2016 raise concerns around the company’s long-term margins, the analyst mentioned.

“Guidance for 2016 implies a low-60% payout, levels that precipitated the last dividend cut, with the payout likely to rise thereafter on higher cash taxes,” the Jefferies report noted, while adding, “CAF-II needs likely limit using capex as a lever, though the potential data center sale could improve the payout story.”