Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Junk Pile

CenturyLink Stock is Junk

CenturyLink (NYSE: CTL) is a horrible company, and its stock is junk. Nothing is going to change that not even the November 1, 2017, acquisition of; or merger with, the fiber-optic operator Level 3.

I have been inflicted with CenturyLink phone and internet service for years and it is terrible. The internet is often as slow as molasses; and sometimes cuts off for no reason, while the phone line sometimes provides audio quality comparable to that from a factory model AM radio in a 1973 Dodge Dart. Worst of all, the customer service absolutely stinks.

Several months back CenturyLink called me saying there was a problem with my bill and put me on hold. They kept me on hold for about 30 minutes then hung up. I called back, and the guy I talked to was unable to learn why they had called me in the first place.

Then there is the difficulty paying the CenturyLink bill, it takes the company several days to realize they have received your instant electronic payment. One time I tried to save money by sending in a direct payment from my bank account. Big mistake, the company would not accept a draft from my bank.

Since then I pay with my debit card, a “privilege” for which CenturyLink charges me a fee of $3. I pay the extra $3 bucks but that’s the only way I can be sure CenturyLink actually received my payment.

Some of you are undoubtedly wondering why I put up with CenturyLink’s horrendous service. I live in a small town and there is no other internet or landline provider here. You either get CenturyLink or “satellite internet” which is worse. If another provider would come to town, I’d switch in a heartbeat.

Is CenturyLink Making Money

Given my experiences with the company, my expectations for CenturyLink’s stock were low. Guess what, CenturyLink lived down to those expectations.

CenturyLink reported a net income of $92 million, an operating income of $487 million, and $139 million in earnings before tax on September 30, 3017. That “income” came from revenues of $4.034 billion.

Worst of all those revenues dropped by 7.94% during the third quarter of 2017, Stockrow reported. CenturyLink should be generating a lot of income because it is a phone company, it has a captive customer, yet its’ revenues are falling because of the horrendous customer service.

CenturyLink running some cash through its till; the company reported an operating cash flow $958 million and a free cash flow of $208 million in September 2017. Those cash flows have been growing slightly, the operating cash flow was $911 million and the free cash flow was $176 million in September 2016.

Does CenturyLink prove that Warren Buffett is wrong about the Idiot Nephew?

The cash flow might explain some of the problems at CenturyLink, the company is taking in just enough cash to pay the bills and finance a large salary for executives. It might also disprove a popular notion of Warren Buffett’s to invest businesses that are so simple to operate somebody’s idiot nephew can run them.

The reason Buffett might be wrong is that once in the executive suite, the idiot nephew is in a good position to loot the company. He might order a new corporate jet instead of updating the equipment, or sell off potentially profitable assets in order to raise the dividend and the price of the stock in his compensation package.

Another danger is that the idiot nephew might spend all his time on the golf course rather than studying the business. He leaves the business on autopilot and gets shocked when it flies straight into the ground.

CenturyLink which began as a family-owned telephone company in Louisiana is a good example of the shortcomings with the idiot nephew principle. It still operates like the year is 1997, and ignores the changes in the telecommunications business that occurred since then.

Tellingly, CenturyLink offers no wireless service; the defunct Qwest which it acquired in 2010 did offer wireless service. Qwest’s wireless business was sold to Verizon.

What’s more disturbing is that instead of improving its business CenturyLink has been buying up other companies. Level 3 Communications is only the latest example those acquisitions.

Interestingly enough, CenturyLink has some good businesses including Fiber Optics and 55 data centers. Unfortunately, he has not extended those services in a good way, Wikipedia reported that many CenturyLink communities are not even served by basic broadband, mine is not.

The business seems to be deteriorating instead of growing despite the acquisitions. The idiot nephew has figured out a way to wreck the company.

How Much Float Does CenturyLink have?

Cynics would say CenturyLink is using the float generated by all those phone and internet customers to cover the cost of acquisitions.

The balance sheet indicates that the cynics are probably right; CenturyLink reported cash and short-term investments of $6.164 billion on September 30, 2017. That money is probably gone because it was used for the CenturyLink purchase.

There might be one good aspect to the Level 3 deal; CenturyLink has new management in the form of Level 3 CEO Jeff Storey. Storey was the one who sold Level 3 to CenturyLink, which probably means he plans to sell CenturyLink as well.

Likely buyers for CenturyLink might include Verizon (NYSE: VZ) or ATT (NYSE: T). A dark horse buyer could be Berkshire Hathaway (NYSE: BRK.B) which might want to enter telecommunications. Datacenters and fiber optics would be logical additions to Berkshire’s infrastructure holdings.

Smart investors should stay far away from CenturyLink, its stock junk which will keep losing value despite the Level 3 deal. There are better buys in telecommunications out there and lots of threats on the horizon.

My prediction is that CenturyLink is headed for a big crash after which it or its components will be sold off. When that happens CenturyLink investors will lose money, but CenturyLink customers will be relieved to see this lousy company put out of its sorry misery.

Even at the $16.68 share price CenturyLink was trading at on 2 January it was junk. Stay far away from this turkey investors; CenturyLink’s stock is just as crummy as its internet and phone service.