CenturyLink Is Diversifying Away From Rural Telecom, Jefferies Says In Upgrade

The sentiment surrounding Centurylink Inc CTL remains negative and weighed down by its legacy rural telecom association, according to Jefferies. The perception is unjustified and the stock should gain at least 25 percent from where it trades today, in the sell-side firm's view. 

The Analyst

Jefferies' Scott Goldman upgraded CenturyLink from Hold to Buy with a price target lifted from $17 to $22.

The Thesis

CenturyLink continues to be seen as a "RLEC," or rural local exchange carrier, a designation given to companies with deteriorating fundamentals that were forced to slash or suspend dividends, Goldman said in the upgrade note.

This profile does not apply to Centurylink, especially after it closed the acquisition of Level 3, the analyst said. One of the major benefits from the deal is CenturyLink's diversification away from legacy consumer and small-to-medium-sized businesses, where revenue decline rates can be twice those of larger enterprise customers, he said. 

Around 23 percent of CenturyLink's revenue now comes from the consumer segment, which is "far below" some of peer figures of 39-52 percent, Goldman said. 

CenturyLink boasts better operating trends than some of its peers, including near-term EBITDA growth, improving — but still high — leverage and a more sustainable dividend payout, the analyst said. 

CenturyLink's superior revenue mix and 11.5-percent dividend yield should generate a total return in excess of 28 percent, according to Jefferies. 

Price Action

CenturyLink shares were down 0.16 percent at $18.75 at the close Tuesday. 

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