CenturyLink Faces Uncertain Outlook, Morgan Stanley Downgrades

Morgan Stanley downgraded Centurylink Inc CTL to Underweight from Equal Weight, lowering the price target to $27 from $31.

The analysts mentioned the following three reasons for the rating change decision:

1. Upside risk to capex.
2. Increasing regulatory risks, including special access reform.
3. Century Link has recently lowered expectations for 2016.

The analysts mentioned the conclusion of the data center sale process as one of the key events for the company. "There is a range of possible outcomes and valuations, and timing remains somewhat uncertain. If CenturyLink is able to sell a significant portion of the data center assets at attractive prices, this could provide additional liquidity, although deleveraging will likely be required with some of the proceeds," wrote Morgan Stanley, adding that CenturyLink could devote some of the proceeds to expanding their network upgrade program, and initiate another buyback program.

The bank also provided lists of potential catalysts and potential risks for the company.

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Potential Catalysts

• Disciplined and accretive M&A
• Data Center sale
• New share buyback program
• Continued revenue improvement, line loss trend and broadband adds
• CAF II Stimulus (revenue from subscribers)
• REIT transaction (longer term)

Potential Risks

• Cable competition (90 percent + overlap)
• Macro pressure on enterprise revenue
• Cloud price cuts from Amazon.com, Inc. AMZN, Alphabet Inc GOOG (GOOGL) and Microsoft Corporation MSFT
• Margin pressure from revenue mix shift
• Increased regulatory pressure
• Pension/OPEB obligation

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