One would think that a telecom that offers telephone and broadband service in 37 states would be a value investment. When that telecom is CenturyLink (NYSE: CTL), one would be wrong.
The value case for telecoms is a rather simple one. They have a captive audience in the form of phone and Internet customers. Those people and organizations have to pay their bills every month if they want service. That should lead to a lot of float, but guess what—it does not.
On September 30, 2015, CenturyLink reported having $355 million in cash and short-term investments even though it reported having assets of $48.75 billion and making $5.207 billion in cash from operations on the same day.
To make matters worse, CenturyLink reported a free cash flow of $708 million and a net income of $728 million the same day. Part of the reason for this was a high dividend yield. Like a lot of marginal companies, CenturyLink tries to lure investors with a high dividend yield—8.63% on September 30, 2015.
This is probably one of the things that eats up CenturyLink’s profits. Another is its liabilities, which were around $34.5 billion on September 30, 2015.
How Much Is CenturyLink Really Worth?
These figures call the value of CenturyLink’s operation into question. Even though it has a $34.33 billion enterprise value on paper, CenturyLink does not appear to be making that much money from the enterprise.
This means that the $13.75 billion market capitalization Mr. Market has given this stock appears to be accurate. CenturyLink is simply not making money despite a reported profit margin of 4.5%.
My guess is CenturyLink is not making money because of the high operating costs of its network. The expense of offering fiber optic service in order to head off the slow advance of Alphabet’s (NASDAQ: GOOGL) Google Fiber and AT&T’s (NYSE: T) aggressive Fiber expansion is one of those costs.
Google Fiber is now operating in or planning to expand to in Atlanta, Austin, Kansas City, Charlotte, Nashville, Provo, Raleigh-Durham, Salt Lake City and San Antonio. Possible expansion plans include some CenturyLink markets, including Florida.
CenturyLink Is Not Making Money
My suggestion for investors would be to stay away from CenturyLink—far away. It is not making that much money, and it could be on very shaky ground. One just has to wonder if this company could compete or even survive.
It seems to lack the resources to counter aggressive and well-financed competitors. My suggestion would be to avoid the telecom sector in general because it is about to face serious and potentially catastrophic disruption from our friends at Alphabet (NASDAQ: GOOG). There seems to be no way that smaller telecoms such as CenturyLink will be able to survive that disruption.
Therefore, CenturyLink is no value investment. Instead, it seems to be overpriced at $25.08 a share. My prediction is that this telecom could collapse in the next few years because it is simply not making money.
One group of people that will not shed any tears for CenturyLink will be its customers. They will not miss the lousy service, unreliable Internet and high prices, although I have a feeling that CenturyLink investors will get burned badly by this lousy stock.