CenturyLink

COMPANY ANALYSIS AND VALUATION

I. The Company, Industry, and

Competitors

Table of Contents
I.

The Company, Industry, and Competitors

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 1-2

Business Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 3
Brief Company History. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 3-4
Operating Segments and Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 4-10
Industry Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 10-13
Corporate Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 14-19
Financial Analyst Rankings & Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 20-22

II.

Financial Performance Analysis

III.

Cost of Capital, Capital Structure Analysis and Distributions

IV.

Financial Statements Forecasts

V.

Cash Flow Valuation

VI.

Relative (Multiples) Valuation Analysis

VII.

Summary and Conclusions

Century Link: The Company, Industry, and Competitors

Recent Mergers & Acquisitions
In 2011, CTL merged with Qwest to expand infrastructure and customer base (118% revenue increase)
CTL acquired AppFog and Tier3 in 2013 in order to expand its cloud platform and services
2014 acquisitions included DataGardens and Cognilytics, which are focused on big data and advanced
predictive analytics
In 2015, CTL acquired Orchestrate to enhance its cloud platform and database as a service (DBaaS)
capabilities
Primary Areas of Business
Voice & Data Communications
Television (Prism TV & partnership w/ DirecTV)
Home/Business Security Services
Broadband Internet via Fiber Optic Plant

Developing Areas of Business

Cloud Computing & Services
IT Services/Big Data
Advanced Predictive Analytics

2014 Operating Revenue by Segment:

4%

42%
54%

Strategic Services

Legacy Services

Data Integration

CTLs Three Business Segments

Strategic services are services with
strong and/or growing demand
including:
Private Line Connections
Managed Hosting & Services
Ethernet
Legacy services are traditional voice,
data, and networking services provided
with copper-wire infrastructure and
include:
Local/Long-Distance Voice
ISDN and WAN
Data Integration services include:
Network Management
Installation & Maintenance
Fiber Optic Networks

Morgan Stanley Earnings Estimates

Year
2015
2016
2017
Revenue
$17,765 (-1.48%)
$17,623 (-.80%)
$17,572 (-.29%)
Free Cash Flow
$2,537
$1,272
$1,533
Earnings Per Share
$2.49
$2.31
$2.40
Industry revenue is projected to decline 1.4% annually between 2015 and 2020
o CTLs revenue is expected to decline slower than the industry (.86% annual decline over
next three years) due to its development into new markets such as cloud services
Wall Street Analysts Opinions
Buy
Buy/Hold
Hold
Hold/Sell
Sell
6
2
8
1
0
94% of analysts recommend either a buy or hold strategy while only 6% recommend a hold/sell

Executive Compensation

Name and Principal

Position

Year

Salary

Bonus

Glen F. Post, III

2014 $1,100,000 $
Chief Executive Officer and President
2013 1,100,000

Restricted
Stock
Awards(1)

Non-Equity
Incentive Plan
Compensation(2)

Change in
Pension
Value(3)

All Other
Compensation(4)

Total

$9,581,227 $
6,086,446

1,597,200 $ 745,535 $
1,683,000

107,486 $13,131,448
123,801
8,993,247

R. Stewart Ewing, Jr.

Executive Vice President, Chief
Financial Officer and Assistant
Secretary

2012
2014
2013
2012
2014
2013
2012

1,047,606
725,000
725,000
684,562
650,000
650,000
616,105

5,157,049
2,917,475
2,106,061
2,250,332
1,992,894
1,438,623
1,744,036

1,767,836
771,980
854,123
1,015,837
692,120
729,300
914,696

649,156
483,645

411,822
462,796

415,853

103,392
59,910
53,845
42,838
44,710
55,769
38,595

8,725,040
4,958,010
3,739,029
4,405,391
3,842,520
2,873,692
3,729,286

Stacey W. Goff
Executive Vice President, Chief
Administrative Officer, General
Counsel and Secretary

2014
2013
2012

520,890
500,000
450,096

1,609,657
1,106,631
1,293,966

611,942
561,000
526,336

339,053

220,263

45,600
37,527
15,965

3,127,142
2,205,158
2,506,626

Aamir Hussain(5)
Executive Vice President, Chief
Technology Officer

2014

85,892

344,945

3,100,634

Karen A. Puckett
President, Global Markets

100,000(6) 2,486,653

83,144(7)

CEO compensation was calculated against AT&T

and Verizon which are significantly larger.
CTL currently maintains the same top
management from XXXX.
CTL pays Glen Post 50% of its total
compensation to Executives

Industry Growth

IBISWorld projects that the industry revenue is expected to decline at an annual rate of
1.4% over the next five years and also that the number of establishments is forecasted to
decline at an annual 3.3% over the same period.

Business Description
CenturyLink is the third largest telecommunications company in the United States where it
owns 12.4 million access lines, operates in 37 different states, and is the incumbent provider of
telephone services in 12 states: these include Colorado, Arizona, Washington, Minnesota,
Florida, North Carolina, Oregon, Iowa, Utah, New Mexico, Missouri, and Nevada. The company
provides a variety of voice and data services including, but not limited to, local and long
distance voice (wireless/wired), broadband, private line, Multi-Protocol Label Switching (MPLS),
managed hosting, colocation, network access, and video services.

Brief Company History

Acquisition History

July 1, 2009: CenturyLink purchased Embarq Corporation for $6.1b to obtain its data,
internet, video, and voice services. This required CTL to take on an additional $4.9b of in
long term debt.
April 1, 2011: CenturyLink acquired Qwest in a $12.7b debt financed reverse merger in
order to double its market share and number of access lines.1
Q4 2014: CenturyLink bought DataGardens, a disaster recovery firm, and an undisclosed
second firm for $95m in order to expand into cloud services.2
2015: CenturyLink purchased Orchestrate to obtain its Database-as-a-service (DaaS)
infrastructure as well as to further expand into cloud services.
Law Suits

CenturyLink is being sued for failure to clear trouble reports in a timely manner. Close to
one third of CenturyLinks downed lines are repaired to slowly according to local
legislation.3
CenturyLink is being sued for stock price manipulation by Pomerantz Grossman Hufford
Dahlstrom & Gross LLP in a class action lawsuit. Dahlstrom & Gross claim that top
management artificially raised CTLs stock price by giving out dividends that were not
sustainable and during this period the controllers exercised an unusually large number
of stock options. The eventual change in dividend policy caused a 22% drop in stock
price and caused 70 million transactions of stock to be fraudulent.4

http://www.denverpost.com/ci_17704874
http://venturebeat.com/2014/12/08/why-centurylink-just-bought-disaster-recoverycompany-datagardens/
3
http://flatheadbeacon.com/2015/07/21/montana-regulator-to-sue-centurylink-for-slowresponse-times/
1
2

https://www.battea.com/class-action-claim/527-securities-class-action-claim-launchedagainst-centurylink.html
3|Page

CenturyLink and other ISPs (Internet Service Providers) are suing the FCC for net
neutrality. CenturyLink is claiming that being listed as a Common Carrier is illegal
according to net neutrality and deserves to be listed as a different entity. This case is not
about CTL discriminating about the payments for priority treatment or blocking entities.
The head of the FCC believes CenturyLink is expected fail in the court of law. However,
this case marks a continuing effort by the entire industry to shirk the regulations of net
neutrality because how limiting net neutrality is to its profits. If CenturyLink wins in
repealing net neutrality the potential revenues are tremendous.5

Events (Possible, Probable or guaranteed to cause an impact of firm value)

In 2011 the Supreme Court ruled that consumers can be bound to contracts that prohibit the use of
class action lawsuits against the company. This effects CenturyLink because this ruling makes contract
violation costs much lower because customers must make claims separately and thus bear the cost of
legal advice separately as well. CenturyLink does take advantage of arbitration clauses.6

CenturyLink Operating Segments and Products

Product Lines:
Strategic Services that management believes are most important to the future performance
of the company and show either strong or growing demand. These services include:
-

Broadband: Allows customers to connect to the internet via existing telephone lines
or fiber optic cables. Substantially all broadband subscribers are located within the
ILEC.
Private Line: A direct circuit or channel specifically designed for connecting two or
more sites for a secure high speed connection. Frequently used for the transmission
of large amounts of data and includes some wireless backhaul.
MPLS: Standing for Multi-Protocol Label Switching, MPLS is a standard data
networking technology used to support real-time voice and video. It allows network
operators the ability to divert and route traffic around link failures, congestion, and
bottle necks.
Managed Hosting: Includes provision of centralized information technology
infrastructure and a variety of managed services including loud and traditional
computing, application management, back-up, storage, and other advanced services
including planning, design, implementation, and support services.
Ethernet: Point-to-Point (P2P) and multi-point configurations that facilitate data
transmissions across metropolitan areas and WANs (Wide Area Networks). It is also

http://www.multichannel.com/news/policy/centurylink-sues-fcc-over-open-internetorder/389866
6

http://www.cnet.com/news/why-you-cant-sue-your-wireless-carrier-in-a-class-action/
4|Page

used to provide transmission services to wireless service providers that use

CenturyLinks fiber-optic cables for its wireless towers.
- VoIP: Voice over Internet Protocol is a real-time, two-way voice communication
service that originates over broadband connection and often terminates on the
PSTN.
- Managed Services: A blend of services including network, hosting, cloud, and IT
services, typically combined with customer premise equipment. These services
include development of solutions to customers communication requirements, endto-end deployment, and ongoing management of the solution for the customer.
Legacy Traditional voice, data, and networking services that are provided with copper-wire
infrastructure. These services include:
-

Local Voice Service: Local calling services for consumers and businesses that for an
additional monthly fee include call forwarding, caller identification, conference
calling, voice mail, selective call ringing, and call waiting. This also includes nonrecurring services like wire installation, maintenance services, service
activation/reactivation. Finally, this includes the sale of Unbundled Network
Elements (UNEs) which allow wholesale customers access to our network to provide
service on its own networks
- Long Distance Voice: Long-distance and toll-free services. International longdistance services include calls that either terminate or originate in the United States
- ISDN: Stands for Integrated Services Digital Network, which uses telephone wires to
support voice, video, and data applications
- WAN: Allows local communications networks to link to other networks in remote
locations
- Switched Access Services: Various forms of switched access services to wireline and
wireless service providers for the use of CenturyLinks network to originate and
terminate its interstate/intrastate voice transmissions
Data Integration Services include network management, installation, and maintenance of
data equipment and the building of proprietary fiber-optic broadband networks for
governmental and business customers.

Operating Segments:
Business The provision of strategic, legacy, and data integration products to enterprise,
wholesale, and governmental customers. It also includes the sale of private line and IT
products.
Consumer the provision of strategic and legacy products to residential customers.

5|Page

Revenue Per Operational Segment ($ in Millions)

Total

Revenue
Cost of Revenue
Gross Profit
Total Gross Margin
% Growth/Loss

2011

2012

2013

2014

$14,471
$6,623
$7,848
54%

$17,320
$8,147
$9,173
53%
20%

$17,095
$8,167
$8,928
52%
-1%

$17,028
$8,509
$8,519
50%
-0.39%

$5,384
$1,972
$3,412
63%

$6,164
$2,418
$3,746
61%
14%

$6,004
$2,359
$3,645
61%
-3%

$5,994
$2,420
$3,574
60%
-0.17%

$9,087
$4,651
$4,436
49%

$11,156
$5,729
$5,427
49%
23%

$11,091
$5,808
$5,283
48%
-1%

$11,034
$6,089
$4,945
45%
-1%

Consumer Segment

Revenue
Cost of Revenue
Gross Profit
Gross Margin
% Growth/Loss
Business Segment

Revenue
Cost of Revenue
Gross Profit
Gross Margin
% Growth/Loss
Source: CTL 2014 and 2015 10-Ks

The revenue per operational segment is provided for the past four years in order to analyze
each segments effectiveness. Important facts to consider are:
-

Total gross margin decreased over the past five years in spite of consolidation during
that same period. Consolidation in this industry is supposed to reduce operating
costs, yet cost of revenue is increasing.
CenturyLink only performed slightly better than the estimated 2.4% annual decline
in industry revenue in 2013 and 2014. This shows CenturyLink is not able to
substantially offset industry losses with recent acquisitions.
Gross margin decreased in both Operational Segments over the past five years
o Revenue in the Consumer Segment grows briefly in 2012 and slumps in 2013
and 2014. Furthermore, cost of revenue increases during this slump. This
implies that CenturyLinks operations are slipping for its consumer
segment.
o While revenue in the Business Segment changed in much the same way as
the consumer segments revenue, the cost of revenue is growing much faster
for the Business Segment. This implies CenturyLinks operations for this
segment are slipping as well.

6|Page

Revenue By Product Line ($ in Millions)

Strategic Services
Legacy Services
Data Integration
Total Operating Revenues

2011

2012

2013

2014

$6,313
$7,621
$537
$14,471

$8,427
$8,221
$672
$17,320

$8,823
$7,616
$656
$17,095

$9,200
$7,138
$690
$17,028

Source: CTL 2014 and 2015 10-Ks

Revenue By Product Line ($ in Millions)

Business Segment

Strategic Services
Legacy Services
Data Integration
Total Revenue (Business)

2011

2012

2013

2014

$3,722
$2,509
$408
$6,639

$5,953
$4,540
$665
$11,158

$6,173
$4,267
$651
$11,091

$6,350
$3,998
$686
$11,034

$2,532
$5,171
$129
$7,832

$2,474
$3,681
$7
$6,162

$2,650
$3,349
$5
$6,004

$2,850
$3,140
$4
$5,994

Consumer Segment

Strategic Services
Legacy Services
Data Integration
Total Revenue (Consumer)
Source: Bloomberg

The two preceding charts show how each product line contributes to revenue, with the second
breaking down each product line into its appropriate operating segment. From this, it is quickly
seen that:
-

Strategic and Legacy Services are about even in terms of contribution to revenue,
while data integration is almost negligible in comparison
Strategic services are growing in both segments, while legacy services are declining;
o The increase in legacy services in 2012 is the result of consolidation, not an
increase in subscribers.
Data integration sharply declined in the consumer segment, raising potential
concern
Overall, growth in business segment revenue quickly outpaced the consumer
segment; this is rather strange given the industry

7|Page

Average Revenue by Product Line

Data Integration
(Business)
4%

Data Integration
(Consumer)
0%

Legacy (Consumer)
24%

Strategic (Business)
33%

Legacy (Business)
23%

Strategic (Consumer)
16%

Strategic (Business)

Strategic (Consumer)

Legacy (Business)

Legacy (Consumer)

Data Integration (Business)

Data Integration (Consumer)

To better visualize the relationship between the product lines and each product lines
contribution to revenue, the above pie chart easily summarizes the data. It is calculated using
the average contribution to revenue over the past four years. Now it is even more apparent
how negligible data integration is and how the business segment dominates sales.

8|Page

CenturyLink Income Statements

For the Years Ended Dec. 31, 2011 - Dec. 31, 2014
2011

2012

2013

2014

26.23%
41.20%

26.01%
41.57%

24.56%
43.51%

86.81%
19.38%
13.19%

85.24%
17.65%
14.76%

25.10%
41.49%
6.03%
91.97%
19.35%
8.03%

Non-Operating Expenses:
GL On Early Ext of Debt -Non-Op
Income Tax Expense (Benefit)
Other Non-Operating Income
Income Before XO Items
Interest Expense

0.00%
2.44%

0.00%
0.97%
2.57%

0.00%
-0.06%
2.56%
-0.33%

0.00%
0.00%
1.87%

3.73%
6.98%

7.18%

7.17%

7.27%

Other Non-Operating (Income)/Expense - Net

Income Before Income Taxes

0.03%
6.18%

-0.19%
6.80%

1.24%

-0.06%
6.16%

0.01%
3.39%

0.00%
3.32%

0.01%
3.16%

0.01%
0.02%
3.38%
4.23%

0.00%
0.01%
3.32%
-1.32%

0.01%

Operating Expenses:
Depreciation and Amortization
Cost of Goods Sold
Impairment of Goodwill
Total Operating Expenses
Selling General and Administrative Expenses
Operating Income

Earnings:
Basic & Diluted EPS Before XO Items
Diluted EPS
Weighted Avg. Shares - Diluted
Basic & Diluted EPS
Basic EPS
Dividends Per Share
Weighted Avg. Shares - Basic
Net Income
Source: Bloomberg

86.63%
18.56%
13.37%

0.01%
3.48%
0.01%

3.47%
3.73%

3.15%
4.28%

Above is the Common-Size Income Statement from CenturyLink from 2011-2014, which is
provided in order to determine the major cost components in the firms financials. The largest
component in CenturyLinks cost structure is the cost of servicing its lines, which accounted
for an average of 41.97% revenue and is showing signs of growing. Not surprising considering
the industry, depreciation and amortization make up a large amount of the operating cost with
an average of 25.48% of revenue. Because these are non-cash expenses disregard this as
irrelevant except to the extent that the company reflects continued investment in network
infrastructure.
In order to accurately assess CenturyLinks performance and determine its value it is necessary
to understand the telecommunications industry and how CTL measures up to its competitors.

9|Page

Therefore, the Wired Telecommunications Industry is examined insofar that it aids effective
analysis of the company.

Industry Analysis
Brief Industry Summary
Over the past five years, the Wired Telecommunications Industry continues to lose relevance as
improvements in wireless technology, market saturation of mobile devices, and the
proliferation of cost effective product substitutes (most notably VoIP) emerged to cede its
market share. IBISWorld projects that the industry revenue is expected to decline at an annual
rate of 1.4% over the next five years and that the number of establishments is forecasted to
decline at an annual 3.3% over the same period. Even worse, the continual decline in
subscriber access lines also effects economies of scale, making it ever more difficult to maintain
profitability of wired voice services. The only factor that is allowing firms in this industry to stay
relevant is the booming demand for high-speed broadband internet which offsets the loss in
revenue from customers switching to wireless alternatives. Nevertheless, it is projected that as
more wireless companies switch to 4G LTE over the next five-year period consumers no longer
choose fiber-optic broadband internet over wireless solutions, as the options feature the same
bandwidth, data transfer, and download speeds for approximately the same cost 2.
As a consequence of these trends, industry giants (AT&T and Verizon) are increasingly focused
on extending the companies fiber-optic networks to provide high speed internet to more
subscribers while demand is still booming, take advantage of the unregulated VoIP services,
and to capitalize on the burgeoning Internet Protocol Television Services (IPTV: Streaming
television, movies, etc.). Furthermore, industry leaders are aiming to increase investment in
wireless services as companies in that segment of the telecommunications are barely able to
keep up with growing demand for mobile internet. The strategies of the industry leaders
heavily imply that for companies in this industry to stay relevant companies must be able to
make the transition from wired to wireless while also showing a robust network infrastructure
to overcome capacity limits and to profit from the predicted increase in demand for backhaul
services.

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Industry Dashboard

Source: IBISWorlds Wired Telecommunications Industry Report

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From the Industry Dashboard the major trends unfolding in the Wired Telecom Industry are
evident. How CenturyLink is assessed depends on how well positioned the firm is to adapt to
and capitalize on these trends. Some of the most important trends include:
-

Voice services declined to a 30.2% share of the industry revenue whilst data and
network services increased to 69.8% of industry revenue
o Demand for internet access shot through the roof as a greater portion of
financial and transactional services are moving online. The demand for
broadband connections is expected to increase through 2015
o Wholesale Network Access contribution to industry revenue is expected to
increase over the next five years as available bandwidth becomes a valuable
commodity
Incumbent Local Telecommunications providers are not regulated on
the prices the companies charge ISPs and wireless providers to use its
networks for any service. Hence, this is an opportunity to raise
prices as demand increases.
o The Other portion of industry revenue is primarily composed of IPTV, whose
contribution to industry revenue is anticipated to expand over the next five
years
AT&T and Verizon continue to expand influence in these services in
hopes to gain market dominance during the industry transition
While the number of mobile internet connections is expected to reach its peak at
some point in time, the rate at which these connections are growing does not seem
to be slowing
o This is crucial when you take into consideration that mobile internet
connections are the greatest threat to the industry aside from VoIP.

Key Success Factors:

Here is a brief analysis on the most essential factors firms need to succeed in this industry and
how well CenturyLink is doing with these factors.
1. Providing backhaul capacity for mobile phone providers
o While CenturyLink operates 12.1 million access lines most of its network
infrastructure is copper wire, which is inferior in terms of data transfer speeds
and bandwidth vs fiber optic cabling.
According to CTLs 2015 10-K, As of Dec. 31, 2014, we maintained
approximately 1.1 million miles of copper plant and approximately 177
thousand miles of fiber-optic plant. Hence, in order to really capitalize
on this opportunity the company needs to invest in the improvement of
its network which is expected to cost a lot of time and money

12 | P a g e

2. Must offer a diversified range of products

o CenturyLink does a good job of providing a diverse bundle of products and the
company also allows customers to choose which services to bundle. The only
issue with this key success factor is that the price in which CTL offers these
services are not as low cost as its larger competitors, whose price structures and
better infrastructure allows the company to charge lower prices.
3. Accessibility to customers
o CenturyLink does not receive the best brand recognition or brand equity with its
consumer segment, but the company is doing particularly well with business
clients. Considering the fact that Business clients in this industry are a source of
stability (long-term contracts) this allows CTL to continue investing in its
infrastructure and in direct advertising to the consumer segment
o Furthermore, the business segments share of industry revenue is going to
increase over the next five years whilst the Consumer Segments share is likely to
decrease
4. Ability to allocate service to area of greatest need
o While it is difficult to fairly assess CenturyLinks competence at this factor, the
fact that most of CTLs network is copper wired does limit its ability to provide
the best service even when the network isnt too heavily taxed. Hence, it is
reasonable to assume that while CTL is able to some extent manage its network
the possibility that other firms with better infrastructure can do this more
effectively with less effort. CenturyLink admits this in its 10-K.

Basis of Competition
Competition in the Wired Telecom industry takes three forms: price, integrated services, and
service quality/reliability. Because it is very difficult for most consumers to differentiate the
quality between two wired telecom firms, customers make a purchasing decision based on the
price. If one firm provides a wider range of services for a smaller price then the consumer is
much more likely to purchase a plan with that company. This then leads to the second form of
competition in the industry of integrated services or bundles. Businesses and consumers
alike show a preference for just one provider for all the businesses and consumers
communication needs as opposed to many different ones. Hence, the more services that a firm
can offer the more valuable its service is perceived by customers/businesses. For business and
governmental clients, service reliability and quality are much more important than price.

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Corporate Control (Share Ownership and Management)

Glen F. Post III - CEO, President, Director:
Current Chief Executive Officer, President, and Director of
CenturyLink, Glen F. Post III, is with CTL since 1976 (39 years). Post
graduated from Louisiana Tech University in 1976 with a Bachelors
in Accounting and an MBA in Business Administration. CenturyLink
was Glen Posts first job out of college, and he quickly worked his
way up the corporate ladder being named Vice President in 1982.
Post continued to climb the corporate ladder, and was appointed
as Chief Executive Officer (CEO), President, and Vice Chairman of the Board in 1992. The
following list shows the positions Glen Post held since joining CTL in 1976:
1976 Joined CenturyLink
1982 Appointed as Vice President
1984 Senior Vice President and Treasurer
1985 Board of Directors
1986 CFO and Senior VP
1988 COO and Executive VP
1990 COO and President
1992 CEO, President, and Vice Chairman of the Board
2002 CEO and Chairman of the Board
2009 CEO and President
Post held positions including COO, CFO, and Treasurer for CenturyLink, so he shows a strong
understanding of operations, accounting, and finances in the telecommunications industry.
Posts position as CEO at CenturyLink for 23 years allowed him to grow CTLs revenues to over
$18 billion in 2014, up from $360 million in 1992 when first appointed as CEO. Furthermore, in
ten years, Post was able to lead CTL, through the acquisitions of Qwest and Embarq, from the
8th to the 3rd largest telecommunications company in the United States. Due to Posts
performance, his fixed salary increased by 13.6% for 2015 bringing his annual fixed salary to
$1,250,000 (up from $1,100,000 for 2014). In 2014, Post additionally earned a performancebased salary of $1,597,200. Restricted stock awards totaled $9,581,227 while pension increased
by $745,535, and other compensation was $107,486. This brought Posts 2014 aggregate salary
and benefits to $13,131,448, which showed a 46% increase over his 2013 salary and benefits of
$8,993,247.

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R. Stewart Ewing Jr. CFO, Executive VP, Assistant Secretary:

Chief Financial Officer, Executive Vice President, and Assistant Secretary,
R Stewart Ewing Jr., is with CenturyLink since 1983 when first appointed
as Vice President of Finance. Ewing holds a Bachelors degree in Business
from Northwestern State University in Louisiana. Ewings positions at CTL
since 1983 include:
1983 VP of Finance
1984 VP and Controller
1989 CFO and Senior VP
1999 CFO and Executive VP
2009 CFO, Executive VP, and Assistant Secretary
Ewing played an important role in the acquisition strategy of CenturyLink by negotiating all
stages of the purchase agreements. This includes anything from legal to regulatory matters, as
well as folding new companies into CTLs corporate philosophy and structure. Stewarts fixed
salary for 2014 is $650,000 and total compensation is $3,842,520. Nearly 50% of his 2014 total
compensation came in the form of Restricted Stock Awards.

Aamir M. Hussain Chief Technology Officer, Executive

VP
As Chief Technology Officer and Executive Vice President, Aamir
Hussain is with CenturyLink since October 2014. Aamir holds a
Masters Degree in Electrical Engineering from Georgia Institute of
Technology. Before joining CTL in 2014, Hussain worked in the
Netherlands as Liberty Globals managing director and chief
technology officer for Europe. He also held technology and
leadership roles in other telecommunications firms including Qwest (acquired by CenturyLink),
TELUS, Motorola, and Samsung. As Chief Technology Officer for CenturyLink, Hussain and his
team are responsible for designing, delivering, and implementing next generation products,
services, and technologies essential to the companys strategic growth goals. Hussain only
worked for CTL for three months in 2014, and as such his fixed salary is only $85,892 and
received a cash-signing bonus of $100,000. His 2014 total compensation was $3,100,634 with
over 75% of the compensation coming in the form of Restricted Stock Awards.

15 | P a g e

Girish K. Varma President, Global IT Services, New

Market Development
In 2011, Girish K. Varma joined CenturyLink as Executive Vice
President and Information Technology Services. In 2014, he was
promoted to President and given the title of Global IT Services as
well as New Market Development. Prior to joining CenturyLink,
Varma was Senior VP and Chief Information Officer at Qwest.
When Qwest was acquired by CTL in 2011 Varma got hired to work
at CenturyLink. Other notable positions Varma held include:
IBM VP of Global Application Services
AT&T VP and Chief Information Officer
Bell Laboratories VP of Information Technologies
Varma not only shows a lot of experience in the telecommunications industry, but he also held
positions with major competitors including Qwest and AT&T. He graduated with a Masters
Degree from Banaras Hindu University in India, as well as a PhD from the City University of New
York. Additionally, Varma received numerous awards for business achievement and software
excellence. Varmas salary and compensation plan are not listed on CTLs 2014 proxy
statement.

Stock Ownership Requirements:

Under CenturyLinks stock ownership guidelines, all executive officers are required to own CTL
stock at market value equal to a multiple of their annual fixed salary. CEO Glen post is required
to own six times his annual salary of $1,100,000, or a market value of $6,600,000 in stock. As of
the end of 2014, CEO and President Glen Post owned a total of $42 million in stock, which is
over six times higher than the target ownership level. All other executive officers are required
to hold three times their annual salary in the form of stock valued at market value. Other
executive officers at CenturyLink held an aggregate of $26.3 million in CTL stock; their stock
holdings are 350% higher than the aggregate target ownership for executive officers. All
executive officers met the stock ownership requirements for 2014, with most officers
significantly exceeding their requirement. The excess ownership of stock over the requirement
indicates that current management and executive officers show optimistic growth projections
for the future.
Outside Directors are also subject to stock ownership requirements equal to five times the
annual cash retainer. The 2014 annual cash retainer is $65,000, so outside directors were
required to hold at least $325,000 at market value in common stock. At the end of 2014, two
directors failed to meet this requirement; the remaining directors held significantly more stock
than the directors were required to. Again, this excess ownership is a potential signal that CTL
expects strong earnings growth in the future.
16 | P a g e

CTL Compensation Plan & Comparable Companies

To compare CenturyLinks compensation plan a larger company (based on 2014 revenues),
Verizon, as well as a smaller company, Level 3 Communications were examined. CenturyLink
compensates executive officers six different ways; a base salary (fixed annual income), a shortterm incentive bonus (non-equity incentive plan), time-based restricted stock, performancebased restricted stock, pension, and other compensation. The following table breaks down the
characteristics of executive compensation.
Pay Element
Salary

Characteristics
Annual Fixed Income (Guaranteed Salary)

Short-Term Incentive
Bonus

Based on achievement of annual performance measures. Half of

these payments are based on Operating Cash Flows (OCF) and the
other half are based on core revenue. The committee can make
adjustments based on performance against individual objectives.
Time-Based Restricted Annual long-term equity rewards that vest based on years of service
Stock
as an executive at CTL
Performance-Based
Long-term annual variable rewards that vest three years from the
Restricted Stock
date of grant. Half of the shares are based on CTLs relative threeyear performance vs. CTLs custom total shareholder return
industry peer group and the other half based on a three-year
revenue target.
All Other
Comprised of personal use of aircraft, reimbursements for physical
Compensation
examinations, reimbursements for leased vehicles, and relocating
executives and their families.
Verizon (VZ) uses a very similar compensation structure, however, VZ uses different metrics to
determine performance-based compensation. Verizon metrics include adjusted EPS (50% of
bonus), FCF (25%), total revenue (20%), as well as diversity and sustainability (5%). Likewise,
Level 3 Communications uses a similar compensation structure with a difference in
performance-based metrics used to determine annual variable compensation. Below is a table
that summarizes the CenturyLink executive compensation:

17 | P a g e

CenturyLink Summary Compensation Table

Name and Principal

Position

Year

Salary

Bonus

Restricted
Stock
Awards(1)

Non-Equity
Incentive Plan
Compensation(2)

Change in
Pension
All Other
Value(3)
Compensation(4)

2014 $1,100,000 $
$9,581,227 $ 1,597,200 $745,535 $
2013 1,100,000
6,086,446
1,683,000

2012 1,047,606
5,157,049
1,767,836 649,156
2014
725,000
2,917,475
771,980 483,645
2013
725,000
2,106,061
854,123

2012
684,562
2,250,332
1,015,837 411,822
R. Stewart Ewing, Jr.
2014
650,000
1,992,894
692,120 462,796
Executive Vice President, 2013
650,000
1,438,623
729,300

Chief Financial Officer and 2012

616,105
1,744,036
914,696 415,853
Assistant Secretary
Stacey W. Goff
2014
520,890
1,609,657
611,942 339,053
Executive Vice President, 2013
500,000
1,106,631
561,000

Chief Administrative
2012
450,096
1,293,966
526,336 220,263
Officer, General Counsel
and Secretary
Aamir Hussain(5)
2014
85,892 100,000(6) 2,486,653
83,144(7)

Executive Vice President,

Chief Technology Officer
Glen F. Post, III
Chief Executive Officer and
President
Karen A. Puckett
President, Global Markets

Total

107,486 $13,131,448
123,801
8,993,247
103,392
8,725,040
59,910
4,958,010
53,845
3,739,029
42,838
4,405,391
44,710
3,842,520
55,769
2,873,692
38,595
3,729,286
45,600
37,527
15,965

3,127,142
2,205,158
2,506,626

344,945

3,100,634

CEO of CenturyLink, Glen Post, received $13,131,448 in total compensation for 2014, which
indicates a 46% increase over his 2013 compensation. This large increase in compensation is
mostly from Restricted Stock Awards due to strong three-year performance relative to the
custom total shareholder return industry peer group. In 2014, Verizons CEO and chairman,
Lowell Macadam, received $18,306,509 in total compensation, or nearly 40% more than Glen
Post of CenturyLink. Level 3 Communications President and CEO, Jeff Storey, received
$10,850,861 in total compensation in 2014, which is only 17% less than Glen Post. The trend
continued for each companys top five paid executives; Verizon executives aggregate total
compensation was about 45% more than CenturyLink, and Level 3s executives total
compensation was about 15% less than CenturyLink.

18 | P a g e

CTL CEO Compensation (2014)

1%
6%

8%

12%

Salary
Restricted Stock Awards
Non-Equity Incentives
Change in Pension
Other
73%

The above pie chart breaks down the percentage of total compensation for CenturyLinks CEO
Glen Post. 73% of his salary is based on time-based restricted stock and performance-based
restricted stock. Since Post is CEO of CenturyLink for 23 years a lot of his compensation comes
from time-based compensation, which vest based on years of service as an executive with CTL.
Furthermore, strong three year performance based on core revenue and custom shareholder
return industry peer group.

Conclusion:
CenturyLinks executive officers compensation relies heavily on performance relative to the
industry, operating cash flows, as well as their effectiveness of generating returns for
shareholders. Over 55% of executives aggregate salaries come in the form of long-term stock
rewards; this ensures their compensation is tied to shareholder interest, and prevents
executives from managing earnings in such a way that destroys shareholder value in the longterm. Furthermore, executives are required to hold a multiple of their salary in common stock
at market value. This also encourages executives to ensure that shareholder value is added and
not simply managing earnings for their own benefit. CEO Glen Post held nearly 700% more
stock than required, and other executives held 350% more than required. Their excess holdings
in CenturyLink stock are a potential indication that officers and management show strong
earnings forecasts in the future.
Comparing CenturyLinks executive compensation to Verizon and Level 3 indicated that
CenturyLinks executives are well-compensated, but not over compensated. All three
companies use similar compensation structures, with CenturyLink executives compensated
about 45% less than Verizon and only 15% more than Level 3 Communications.
19 | P a g e

CenturyLink Financial Analyst Rankings & Opinion

Negative Earnings Surprise:
In Q2 CenturyLink failed to meet the Street Consensus for earnings across the board, with the
most notable discrepancies being EBITDA roughly 4% below estimates and Operating Cash Flow
Margins falling short 1.3%. While most of these discrepancies are relatively small, the
discrepancies still merited a small readjustment in Q3 earnings estimates as well as a decrease
in forecasted earnings for FY2016 and FY2017. Because each analyst report shows a slightly
different perspective on the cause of the revenue shortfall and the implications for the firm,
two professional earnings forecasts are listed along with the analysts expectations on
CenturyLinks coming performance.

JPMorgan Analyst Report Highlights:

JPMorgan: CTL Earnings Estimates
$ in mm

Revenue
EBITDA
Operating Cash Flow
Free Cash Flow
EPS

2015E

2016E

%Change Y/Y

$17,753
$6,703
$5,399
$3,373
$6.06

$17,694
$6,557
$4,060
$1,843
$3.41

-0.33%
-2.18%
-24.80%
-45.36%
-43.73%

Source: Thomson One Database

For the sake of clarity the earnings portion of JPMorgans two-year forecast for CenturyLink are
provided. Key take away facts from this table and analyst report are:

JPMorgan projects that CenturyLink is forecasted to continue to decline in revenue and

profitability as its Legacy Services continue to lose relevance and its Strategic Services
are forced to maintain low margins due to intense competition.
Despite the fact that CenturyLinks payout ratio is projected to reach 90% in 2016 it
wont mean much as the company is projected to lose a whopping 45.36% in free cash
flow that year.
Due to declining profitability, projected deterioration in the economic fundamentals
of the industry, and CenturyLinks inability to improve on operating metrics in recently
acquired Qwest territories JPMorgan remains neutral on the stock.
o Yet paradoxically JPMorgan maintains its price target of $30.00 as JPMorgan
expect the market to continue to overvalue CenturyLinks earnings potential.

20 | P a g e

Morgan Stanley Analyst Report Highlights:

Morgan Stanley Research put together an excellent analyst report that provides a more indepth analysis of CenturyLinks performance over the past four years as well as a two year
forecast. This makes it a perfect addition to the background industry analysis, which also takes
place from 2010-2020. First all of the relevant tables from Morgan Stanleys Report are
provided.
Morgan Stanley: CTL Earnings Estimates Revision
2015E
Adjusted

Revenue
EBITDA
Free Cash Flow
Earnings Per Share

$17,765
$6,741
$2,537
$2.49

Previous

% Change

$17,914
$6,935
$2,556
$2.71

-0.83%
-2.80%
-0.74%
-8.12%

Morgan Stanley: CTL Earnings Estimates Revision (Cont.)

2016E

Revenue
EBITDA
Free Cash Flow
Earnings Per Share

2017E

Adjusted

Previous

% Change

Adjusted

Previous

% Change

$17,623
$6,483
$1,272
$2.31

$17,932
$6,837
$1,273
$2.76

-1.72%
-5.18%
-0.08%
-16.30%

$17,572
$6,414
$1,533
$2.40

$17,988
$6,676
$1,565
$2.74

-2.31%
-3.92%
-2.04%
-12.41%

Morgan Stanley: Dividend Yield Forecasts

AT&T
Verizon
CenturyLink
Frontier
Windstream
TDS

2015E

2016E

2017E

5.4%
4.8%
7.8%
8.1%
10.6%
1.8%

5.5%
4.9%
7.8%
8.1%
10.6%
1.9%

5.6%
5.1%
7.8%
8.1%
10.6%
2.0%

Source: Thomson One Database

From a quick look it is easy to identify a few major facts from the above tables:

While adjustments are mostly minor across the board, Morgan Stanley also projects
major declines in CenturyLinks profitability as seen by the predicted 49.86% decrease
in FCF from 2015 to 2016 and an overall decrease of 39.57% from FY2015 to FY 2017.
o However, Morgan Stanley projects that FCF is expected to increase shortly
thereafter in FY2017 as CenturyLink gets a grip on its operating segments. This
potentially indicates a turnaround
21 | P a g e

Adjustments to EBITDA are relatively large verifying JPMorgans statement on

CenturyLinks declining EBITDA margins via cross examination
o While adjustments to EPS were the largest the overall decrease over the next
two years is small compared to the decrease in FCF.
Nevertheless, this is extremely problematic, as CenturyLink needs to
increase its payout ratio to avoid its shareholders sinking an earnings
drop dramatically. This comes at the cost of CenturyLink making the
much needed investments in its infrastructure to stay relevant.
From the Dividend yield forecasts it is evident that the top competitors (ATT and
Verizon) are growing in dividend yield whilst CenturyLink struggles to maintain its
dividend yield.

Analyst Rankings and Buy/Sell/Hold Recommendations:

Buys
6

Wall Street Analyst Opinions

Buy/Holds
Holds
Hold/Sells
2
8
1

Sells
0

Source: S&P Capital IQ

Wall Street Analyst opinions are provided above regarding CenturyLink in order to gauge what
the markets perspective on the company is. The key takeaways from this table is:
Because CenturyLink is paying and expected to continue to payout most of its free cash
flow the majority of Wall Street Analysts agree to buy and/or hold the stock despite
serious issues with business and economic fundamentals
o Consensus on Wall Street is that CenturyLink is expected to continue to be
overvalued for quite some time and not to short the stock until more dividend
revenue is earned
o If not overvalued, Wall Street also believes in CenturyLinks ability to push
through its operating struggles and eventually capitalize on the market position
in time.
This follows from Morgan Stanleys two year projection for CenturyLinks
free cash flow to rebound

22 | P a g e

CenturyLink
COMPANY ANALYSIS AND VALUATION

II. Financial Performance Analysis

Table of Contents
I.

The Company, Industry, and Competitors

II.

Financial Performance Analysis

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 23-24

Year over Year (YoY) Growth Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 25-26
Average Growth Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 27-28
Financial Ratio Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 29-36
Price Performance Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 38-44

III.

Cost of Capital, Capital Structure Analysis and Distributions

IV.

Financial Statements Forecasts

V.

Cash Flow Valuation

VI.

Relative (Multiples) Valuation Analysis

VII.

Summary and Conclusions

Executive Summary: Financial Ratio and Price Performance Analysis

Price Performance

CenturyLink (CTL) underperformed both the SPX and RGUST14

CTLs price performance for the past decade is mediocre with respect to its peer group and CTLs returns are
positive but negligible.
o CTLs last twelve month performance is the worst in its peer group for both pure price performance
and ratio performance
CTL is the bottom of its peer group, due to poor acquisition performance including a $1.1
billion impairment of goodwill, with a price of $63.03 vs. the top performer Vonage Holdings
(VG) with price $192.55 and median performer Cogent (CCOI) with price $92.45.

Financial Performance
d

Altman Z-Score
Annual Trend
3
2.5
2
1.5
1
0.5
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Values below the red indicates impending

financial distress/equivalently bankruptcy
CTL continued to decline in the Altman Z-score
and the cause of primary drivers are as follows:
I.
The merger with Qwest doubled CTLs
assets but, earnings before interest
and taxes remained constant
II.
CTL took on debt to pay for Qwest
which means retained earnings relative
to its assets decreased
III.
Revenue was largely unaffected by the
merger despite its assets doubling

DuPont Analysis

DuPont Key Drivers

20.00%

DuPont Analysis: Equity Multiplier

4.00
3.50

15.00%

3.00

10.00%

2.50
2.00

5.00%

1.50
0.00%

1.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-5.00%
Profit Margin

Return on Equity

0.50
0.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

DuPont Analysis: Total Asset

Turnover

DuPont Analysis: Total Asset

Turnover

0.50x

0.50x

0.40x

0.40x

0.30x

0.30x

0.20x

0.20x

0.10x

0.10x

0.00x

0.00x
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

DuPont analysis reveals that the primary cause of declining return on equity is loss of net margin
CTL continues to take on more debt which is common for the industry
CTL maintained and kept its total asset turnover ratio consistent over the last decade despite large mergers and
acquisitions with Qwest, Embarq and others
CTLs acquisition of Qwest led to an inability to control costs (COGS & SGA), which is destroying profitability.
o The 72% decrease in profit margin in 2011 and the 131% decrease in 2013 due to a $1.092b impairment
of goodwill are the primary cause of the 114% decrease in return on equity during 2011-2013.
o Even without extraordinary items CTLs profit margin dropped 48.6% between 2012 and 2013 however
in 2013-2014 the profit margin rose 59.9%. If CTL continues to earn future losses its losses on the
Income statement are expected to be magnified because of future impairments.
o Furthermore, operations failure to capitalize on the Qwest acquisition pushed CTL into financial
distress as shown in the Altman Z-Score annual trend (anything below the red line indicates distress).
Despite the rebound in 2014, CTL made little progress towards mitigating distress
CTLs financial performance in terms of ratio and growth analysis is summarized as follows:
o Revenue growth is 29.38% per year compared to top performer J2 Global with 19.52% average
o Interest coverage of 1.84 is three times less than the industry average; this is problematic given their
lack of profitability
o CTLs TATO is worse than its main competitors, indicating an inefficient use of acquired assets

Ticker
CTL
ATNI
CCOI
CNSL
FTR
JCOM
TU
VG
WSTC
Industry

Company
CenturyLink
Atlantic Tele-Network
Cogent Communications Holdings
Consolidated Communications Holdings
Frontier Communications Corp
J2 Global Inc.
TELUS Corp
Vonage Holdings Corp
West Corp
Industry Averages

Year-over-Year Growth Performance

Growth performance year over year (YoY) examines the annual growth rate of revenue,
operating income, net income, and earnings per share between 2010 and 2014.
Ticker
ATNI
CCOI
CNSL
FTR
Revenue Growth %
JCOM
TU
VG
WSTC
CTL
ATNI
CCOI
CNSL
FTR
Op. Income Growth % JCOM
TU
VG
WSTC
CTL
Industry

2014
14.86
9.2
5.68
0.23
15.02
5.21
4.81
-17.4
-0.35
33.54
16.78
-12.03
-16.39
6.15
7.54
-8.68

2013
-60.5
9.78
19.49
-4.99
40.23
3.8
-2.36
1.81
-1.53
-35.57
49.04
94.13
-0.65
8.18
5.13
-18.98

2012
-2.35
3.76
34.52
-4.41
12.49
5.04
-2.44
5.89
19.71
80.02
-15.17
-14.64
9.73
19.28
7.06
-44.47

-3.92
65.86
9.87

0.43
-46.44
6.14

2.15
33.98
8.66

2011
2010
22.62 156.16
15.98
11.71
-2.37
-5.61
38.06
79.31
29.27
4
6.32
1.8
-1.66
-0.45
4.32
0.52
118.01
41.56
44.32
-45.07
139.93
-5.07
-6.8
16.53 27.36
30.82
-0.52
3.14
7.86
22.4
66.17
11.41
-1.7
29.09

4.88
67.05
15.12

25 | P a g e

Net Income Growth

%

EPS Growth %

Ticker
ATNI
CCOI
CNSL
FTR
JCOM

2014
-84.55
-98.59
-51.1
17.78
16.56

2013
537.04

2012
124.52

2011
-43.32
1027.35
-18.64
-2
38.19

2010
8.2

446.29
-17.42
-11.56

-78.64
-8.67
5.94

TU
VG
WSTC
CTL
Industry
ATNI
CCOI
CNSL
FTR
JCOM
TU
VG
WSTC
CTL
Industry

10.12
-28.36
10.62
423.01
23.94
-84.73
-98.35
-53.95
18.18
13.16
14.93
-30.77
3.93
440
24.71

-1.82
-22.76
14.07
-130.76
101.64
529.71

8.12
-91.05
-1.53
41
-0.039
121.99

17.44

4.01

111.42
-52.9
134.69
-43.15

-31.65
-8.93
7.60
6.9

406.67
-15.38
-12.64
-0.25
-18.75
-10.1
-132
93.41

-82.95
-13.33
7.41
7.75
-90.53

-19.27
-34.78
34.25
16.15

29.76
-39.47
22.3
2.55

16.82
4.69

-65.81
18.77

-3.1
3.16

30.88
26.4
24.27

In 2010 and 2011, CTL outpaced the revenue growth of many of its competitors due to the
acquisition of Savvis in 2009 and merger with Qwest in 2011. However, CenturyLink saw
declining revenue growth in 2013 and 2014. Operating income decline in 2013 is due to the
companys $1.092 billion impairment of goodwill; CTL impaired its goodwill because of poor
performance post-merger with Qwest. CTLs net income growth is not stable as the company
recently experienced periods of negative net income growth, mainly caused by impairment of
goodwill in 2013.

26 | P a g e

Average Growth Performance

Ticker

Revenue Growth %

OP Income Growth %

Net Income Growth %

EPS Growth %

ATNI
CCOI
CNSL
CTL
FTR
JCOM
TU
VG
WSTC
Industry
ATNI
CCOI
CNSL
CTL
FTR
JCOM
TU
VG
WSTC
Industry
ATNI
CCOI
CNSL
CTL
FTR
JCOM
TU
VG
WSTC
Industry
ATNI
CCOI
CNSL
CTL
FTR
JCOM
TU
VG
WSTC
Industry

Three Year
Average
-23.77
7.55
19.32
5.51
-3.09
21.97
4.68
-0.05
-3.79
4.68
15.7
13.87
13.39
5.97
-3.04
11.06
6.57
-25.66
-0.48
4.15
30.24
-52.72
-17.06
10.45
-3.87
2.98
5.34
-63.27
7.5
2.98
28.76
-51
-26.46
8.32
-4.66
2.02
7.3
-62.38

Five Year
Average
6.83
10.01
9.37
29.38
17.64
19.52
4.42
-0.46
-1.36
9.37
4.19

Ten Year
Average
14.89
15.33
8.96
22.31
8.09
18.87
4.64
26.98
6.19
14.89
7.83

5.22
14.34
6.23
12.26
6.13
-3.52
4.55
6.18
6.26

10.06
12.32
5.41
15
5.11

-1.32

6.08
8.83
14.79

-9.56
3.59
1.93
13.4
7.38

8.63
6.3
14.77
9.68

12.42
5.06
5.35

3.42
9.60
12.06

-16.06
-15.89
-19.31
11.76
8.03

-5.56
-5.55
15.05
11.4

-4.35

1.27
5.48
27 | P a g e

Again, it is easy to see that Century Link is greatly outperforming its competitors in terms of
revenue growth due to recent mergers and acquisitions. However, the table clearly shows the
issues with CTLs operating expenses as a proportion of sales. Assuming operating income grew
at the same pace as sales growth it is expected that operating income average 29.38% per year
over the last five years. In reality, operating income only grew by 14.34% per year, which shows
that sales growth outpaced operating income growth by 104.9%. In 2013, impairment of
goodwill (expense of $1.092 billion) caused operating income and net income to suffer. Also,
SG&A and other operating expenses peaked in 2013 and are since declining. In the most recent
six quarters, CTL successfully decreased its operating expenses, which is helping operating
income growth catch-up to sales growth.

Average Growth Performance Analysis:

As shown in the growth performance section, CenturyLink (CTL) merged with Qwest in April
2011, which increased net sales by 118%. This merger forced CTL to change its capital structure
as CTL is taking on more debt. The telecommunications industry continues to grow more
competitive since the Telecommunications Act of 1996, which is meant to stimulate
competition in the industry. CTLs changing capital structure lead to large interest expenses and
increased the risk of the firm.

28 | P a g e

Profitability Ratios

Profit Margin %

Op. Profit Margin %

Return on Assets %

Ticker
ATNI
CCOI
CNSL
CTL
FTR
JCOM
LVLT
RNG
TU
VG
Industry
ZAYO
ATNI
CCOI
CNSL
CTL
FTR
JCOM
LVLT
RNG
TU
VG
Industry
ZAYO
ATNI
CCOI
CNSL
CTL
FTR
JCOM
LVLT
RNG
TU
VG
WSTC
ZAYO
Industry

2014
14.32
0.21
2.37
4.28
2.78
20.76
4.63
-21.98
11.95
2.33
2.74
-11.53
25.4
14.2
14.3
13.37
17.2
31.1
14.9
-20.56
20
5.5
13.45
12.55
5.4
0.11
0.76
1.51
0.75
8.7
1.86
-28.99
6.36
3.08
4.34
-3.86
1.69

2013
106.45
16.29
5.12
-1.32
2.37
20.65
-1.73
-28.72
11.42
3.41

2012
6.6
-1.34
1.12
4.23
2.73
32.74
-6.62
-30.9
12.07
4.31

2011
2.87
2.47
7.6
3.73
2.85
34.76
-17.45
-17.63
11.72
47

2010
6.21
0.25
8.5
13.46
4.02
32.52
-17.04
-14.55
10.6
-9.45

2.02

1.03

2.87

3.45

-15.96
21.9
13.3
17.2
8.02
20.6
33.7
10.5
-25.56
19.5
6.3

-13.66
13.4
9.8
10.6
14.76
19.7
43.7
9
-29.54
19.3
7.6

-0.33
7.3
11.9
16.7
13.19
17.2
41.2
1.2
-17.55
18.9
13.4

6.2
5.8
17.2
29.25
20.3
40.7
-2.5
-14.52
19.5
10.7

11.86

11.75

12.91

13.26

4.99
35.21
8.33
1.74
-0.45
0.66
10.1
-0.83
-44.21
6.16
4.75
4.13

10.91
5.48
-0.71
0.38
1.41
0.78
14.77
-3.18
-77.81
6.53
6.58
3.75

18.59
2.56
1.55
2.2
1.47
0.85
19.39
-7.02

6.03
0.18
2.68
4.25
1.23
17.55
-7.14

6.17
98.97
4.09

5.35
-29.16
1.99

2.94

1.41

2.38

0.27

29 | P a g e

Return on Equity

ROI (Operating)

EBITDA Margin

Ticker
ATNI
CCOI
CNSL
CTL
FTR
JCOM
LVLT
RNG
TU
VG
ZAYO
Industry
ATNI
CCOI
CNSL
CTL
FTR
JCOM
LVLT
RNG
TU
VG
WSTC
ZAYO
Industry
ATNI
CCOI
CNSL
CTL
FTR
JCOM
LVLT
RNG
TU
VG
WSTC
ZAYO
Industry

2014
7.29
0.57
6.41
4.79
3.45
16.29
8.08
-60.42
18.42
5.94
-35.06
5.94
7.08
4.76
4.41
6.53
5.44
10.51
7.38
-41
10.78
4.99
15.95
1.57
3.20
40.7
32.47
39.32
29.83
35.47
33.7
23.67
-16.31
20.02
7.45
22.65
31.46
23.61

2013
63.78
32.09
22.03
-1.31
2.76
16.53
-8.44
-144.99
16.48
8.58

2012
15.57
-2.63
6.47
3.86
3.19
21.16
-35.6
-4634.71
17.34
11.8

2011
7.54
4.78
48.34
3.76
3.1
23.28
-145.95

2010
14.26
0.45
46.09
9.92
5.53
21.63
-372.46

15.54
481.45

13.2

12.53
50.11
13.2
6.19
3.72
4.63
12
6.77
-68.68
10.64
7.52
17.3

5.17
9.83
4.13
5.67
6.55
4.56
15.53
5.87
-286.12
10.89
10.5
17.7

7.54
5.73
6.64
6.21
6.79
4.38
23.08
0.65

11.56
9.95
3.32
7.61
12.05
5.25
20.32
-1.36

10.54
178.43
18.31

9.94
16.69

7.52
36.58
31.74
43.74
24.73
35.06
33.32
20.67
-19.8
19.63
6.89
21.37
31.14
22.59

6.55
26.75
29.46
35.52
30.84
35.08
45.33
15.93
-24.1
19.63
7.89
22.24
36.76
23.14

6.72
19.76
32.39
42.17
30.1
34.17
43.09
14.65
-12.91
19.18
12.02
23.17

9.31
21.7
27.22
41.18
47.1
36.56
42.92
17.89
-11.95
19.11
-3.86
19.96

23.80

23.61

30 | P a g e

In the two years prior to CenturyLinks merger with Qwest, CTL averaged a 13.24% profit
margin and a 27.02% operating profit margin; the following four years yielded an average profit
margin of 2.73% and operating margin of 12.34%. However, CTLs negative 1.32% profit margin
in 2013 is negatively impacted by the impairment of goodwill in the amount of $1.092 billion
(6.03% of 2013 sales). By excluding 2013, CTL averaged a 4.08% profit margin since the merger
compared to an average industry profit margin of 4.42%. Although profit margins dropped
significantly after the merger, CTLs profit margin is still within the average industry profit
margins. A similar trend continues with the other profitability measures; there is a drop-off in
financial performance after the merger, but even after the drop-off CTL is still performing as
well as the industry and other competitors.

Liquidity Ratios

OCF Ratio

Current Ratio

Ticker
ATNI
CCOI
CNSL
CTL
FTR
JCOM
LVLT
RNG
TU
VG
WSTC
ZAYO
Industry
ATNI
CCOI
CNSL
CTL
FTR
JCOM
LVLT
RNG
TU
VG
WSTC
ZAYO
Industry

2014
0.69
0.72
1.37
1.25
0.9
1.29
0.69
-0.18
1
0.49
0.87
1.86
0.91
4.34
5.66
0.86
0.91
0.98
4.05
0.78
2.09
0.62
0.62
1.65
1.58
2.01

2013
-0.77
0.84
1.26
1.23
1.05
1.99
0.44
-0.49
0.95
0.45
0.8
2.16
0.83
3.9
2.47
0.75
0.89
1.24
3.39
1.01
2.45
0.71
0.8
1.8
1.08
1.71

2012
1.19
1.61
1.07
1.41
1.13
2.49
0.33
-0.45
0.87
0.6
0.73

2011
0.93
1.69
1.61
1.67
1.2
2.61
0.29

2010
1.05
1.84
1.5
1.5
1.33
2.22
0.27

0.64
0.74
0.89

0.76
1.17
0.85

1.00
1.61
5.44
0.75
0.79
1.34
4.78
1.02
0.99
0.63
0.81
1.66

1.23
1.26
5.71
1.97
0.88
1.07
3.68
1.03
0.77
0.53
0.61
1.49

1.25
1.12
2.13
1.8
1.13
0.78
2
1.02

1.80

1.73

1.26

0.35
0.65
1.59

31 | P a g e

Quick Ratio

Ticker
ATNI
CCOI
CNSL
CTL
FTR
JCOM
LVLT
RNG
TU
VG
WSTC
ZAYO
Industry

2014
3.64
5.35
0.66
0.54
0.94
3.9
0.68
1.96
0.47
0.36
0.82
1.01
1.69

2013
3.26
2.33
0.57
0.49
1.18
3.18
0.9
2.16
0.55
0.54
1.47
0.55
1.43

2012
1.32
5.24
0.61
0.47
1.2
4.57
0.94
0.73
0.48
0.63
1.35

2011
0.9
5.5
1.76
0.52
0.8
3.41
0.94
0.29
0.4
0.37
1.2

2010
0.7
1.92
1.54
0.98
0.57
1.66
0.91

1.59

1.46

1.03

0.25
0.49
1.26

CTLs operating cash flow (OCF) ratio shows that it is generating enough operating cash flow to
cover its current liabilities. Between its competitors, CTL is one of only two companies to
maintain an OCF ratio over 1.0 in the most recent five years. CenturyLink is effectively
minimizing current liabilities and still generating good operating cash flows. Despite its effective
use of current liabilities, the company does not use many current assets either. CTLs poor
current and quick ratios expose a potential liquidity issue; deferred taxes make up 24.6% of
Century Links current assets, which is, in part, why CTL shows the lowest quick ratio between
its competitors. CTLs worst liquidity ratios are in 2012 after the company acquired Qwest due
to higher amounts of short-term debt which Century Link used to finance the merger. Since
2012, CTLs ratios are trending up towards the average industry trends. Although CTLs liquidity
ratios are still below average and indicate potential liquidity issues, the company is generating
enough operating cash flows to cover short-term liabilities.

32 | P a g e

Leverage Ratios

LT Debt to Equity

Total Debt to
Equity

Interest Coverage

Ticker
ATNI
CCOI
CNSL
CTL
FTR
JCOM
LVLT
RNG
TU
VG
Industry
ZAYO
ATNI
CCOI
CNSL
CTL
FTR

2014
0.05
7.11
4.21
1.34
2.59
0.72
1.73
0.09
1.21
0.42
2.48
7.79
0.06
7.29
4.24
1.38
2.67

2013

JCOM
LVLT
RNG
TU
VG
Industry
ZAYO
ATNI
CCOI
CNSL
CTL
FTR
JCOM
LVLT
TU
VG
WSTC
ZAYO
Industry

0.72
1.78
0.27
1.26
0.49
2.55
7.84
203.75
0.87
1.1
1.84
1.18
5.97
1.55
5.17
7.23
2.46
0.28
1.84

0.35
5.93
0.55
0.98
0.4
2.70
4.69
5.28
1.18
1.21
1.12
1.45
8.25
1.03
4.93
8.38
2.06
0.54
3.22

2.06
8.2
1.17
1.94
0.35
5.9
0.39
0.93
0.32
2.59
4.65
2.56
8.27
1.22
2.01

2012
0.75
2.41
9.16
1.01
2.04
0.41
7.27
184.94
0.74
0.08
20.88

2011
0.87
2.28
20.69
1.03
1.84

0.73
0.19
4.33

0.67

0.8
2.47
9.23
1.07
2.18

0.96
2.36
20.91
1.05
1.86

1
1.21
13.21
0.76
1.59

0.41
7.46
96.89
0.87
0.18
1.63
6.4
0.9
0.74
2.06
1.44
22.4
0.79
6.16
10.99
1.76
1.38
5.00

2010
0.96
1.16
13.2
0.76
1.54

7.03

3.05

7.08
0.93
0.3
1.46

0.83

3.12
1.08
1.27
1.89
1.36

4.07
0.97
1.3
3.7
1.49

0.07
5.05
6.85
1.74

4.04
1.98
1.66

2.49

2.40

3.10

33 | P a g e

Leverage Ratios (cont.)

EBITDA to Int.
Coverage

Ticker
ATNI
CCOI
CNSL
CTL
FTR

2014

2013

2.47

2.64

2012
7.77
2.57

5.22
2.82

4.62
3.22

5.68
3.28

LVLT
RNG
TU
VG
WSTC
ZAYO
Industry

2.78
-17.35
9.25
14.54
3.41
1.94
2.79

2.26
-5.95
8.99
13.49
2.63
2.14
3.78

1.81
-18.39
10.32
16.36
2.43
3.05
3.49

2011
9.17
2.79
3.05
5.64
3.46

2010
11.55
4.3
3.01
6.27
3.19

1.2
-65.15
10.02
8.96
2.37

1.33
-32.74
6.99
3.05
2.34

3.26

3.12

CenturyLinks long-term debt to equity ratio is steadily rising subsequent to the merger with
Qwest and the acquisitions of Savvis and Embarq. Not only did CTL use long-term debt to
finance the mergers and acquisitions, but the company is also using long-term debt to buy back
stock. The main concern for CTL is the fact that its interest coverage ratio is nearly three-times
lower than the industry average. CTLs most recent interest coverage of 1.84 is more than
enough to cover its 2014 interest expense, however, in a bad year, CTL is prone to potentially
failing to generate enough EBIT to cover its interest. Since the wired telecommunications
industry requires a lot of capital and assets, CTLs depreciation expense is very high. As
depreciation is a non-cash expense, EBITDA is a better measure for interest coverage. Looking
at EBITDA to interest coverage, CTL appears to be generating enough EBITDA to cover its
interest expense.

34 | P a g e

Asset Efficiency Ratios

Ticker
ATNI
CCOI
CNSL
CTL
Total Asset Turnover FTR
JCOM
LVLT
RNG
TU
VG
WSTC
ZAYO
Industry
ATNI
CCOI
CNSL
CTL
A/R Turnover
FTR
JCOM
LVLT
RNG
TU
VG
WSTC
ZAYO
Industry
ATNI
CCOI
CNSL
CTL
Fixed Asset Turnover FTR
JCOM
LVLT
RNG
TU
VG
WSTC
ZAYO
Industry

2014
0.4x
0.52x
0.37x
0.35x
0.28x
0.39x
0.4x
01.32x
0.5x
01.36x
0.61x
0.24x
0.56x
07.66x
012.05x
010.55x
09.1x
010.7x
08.31x
09.61x
041.12x
09.52x
037.47x
05.51x
01.29x
09.57x
01.15x
01.11x
0.73x
0.97x
0.67x
16.98x
0.75x
010.42x
01.35x
019.44x
06.21x
0.43x
01.13x

2013
0.38x
0.5x
0.32x
0.34x
0.27x
0.42x
0.48x
01.54x
0.53x
01.32x
0.77x

2012
0.33x
0.51x
0.34x
0.33x
0.28x
0.48x
0.48x
02.52x
0.54x
01.39x
0.79x

2011
0.83x
0.53x
0.34x
0.39x
0.28x
0.45x
0.4x

2010
0.89x
0.63x
0.31x
0.32x
0.3x
0.56x
0.42x

0.54x
01.53x
0.8x

0.53x
02.11x
0.79x

0.62x
07.43x
011.93x
09.81x
09.29x
09.68x
07.54x
09.1x
055.97x
08.67x
046.17x
06.x

0.73x
05.42x
012.74x
010.88x
09.47x
09.91x
09.96x
09.34x
073.12x
07.55x
041.39x
06.13x

0.61x
010.47x
012.93x
010.7x
011.52x
08.72x
013.18x
09.5x

0.69x
011.59x
012.54x
09.66x
010.07x
08.85x
018.09x
012.44x

07.82x
044.37x
06.39x

09.58x
052.64x
06.56x

09.29x
01.08x
01.08x
0.63x
0.96x
0.6x
17.26x
0.77x
09.53x
01.36x
017.06x
07.36x

09.91x
0.83x
01.07x
0.67x
0.95x
0.65x
20.5x
0.78x
08.69x
01.37x
014.7x
07.35x

010.59x
01.59x
01.02x
0.81x
01.09x
0.67x
21.82x
0.64x

010.83x
01.6x
01.04x
01.09x
0.97x
0.69x
23.58x
0.66x

01.35x
013.21x
07.2x

01.33x
011.84x
07.08x

01.08x

01.07x

01.22x

01.21x
35 | P a g e

CTL shows worse asset turnover (TATO) than the industry average and many of its competitors;
this is due to the infrastructure and equipment required in the telecommunications industry.
However, CTLs total asset turnover is worse than its main competitors, which indicates CTL is
not efficiently using its assets to generate sales. Property, plant & equipment (PP&E) turnover
for CTL is much better than its total asset turnover; CTL is using its net fixed assets more
efficiently than total assets. The large difference between its TATO and PP&E turnover is
explained by goodwill. CenturyLinks total assets equal $50.1 billion, and goodwill makes up
$20.7 billion, or 41.32% of its total assets. Since goodwill isnt a tangible asset, PP&E is a better
measure of CTLs effectiveness at turning assets into sales. Century Links PP&E turnover is still
worse than its competitors, so CTL is not effectively turning over its assets as compared to its
competitors.

Financial Ratio Analysis Conclusion

It is evident that CTLs merger with Qwest caused many of its ratios to worsen, including profit
margin, operating profit margin, quick ratio, interest coverage, and ROE. Despite the negative
effects of the merger with Qwest, CTLs ratios are trending upwards post-merger with Qwest.
Even with the companys poor performance over the last three-year period as compared to pre
Qwest, CenturyLink shows average performance when benchmarked against its competitors
and the industry averages. As CenturyLink wraps up its employee-retraining program, it is
expected that operating profit margin, and profit margin is projected to rebound. However, CTL
must find a way to lower its cost of revenue and use its assets more efficiently in order to
restore the companys performance to pre Qwest metrics.

36 | P a g e

Price Performance Analysis

Relative Strength Indices
Relative strength indices compare the price performance of several securities relative to an index by plotting the end of the day price of the
securities divided by the end of the day value of the index. This allows analysts to quickly rank the price performance of the target in this case
CenturyLink amongst comparable companies. The following relative strength indices reflect price performance for the last twelve months with
respect to the Russell 3000 Wired Telecommunications Subsector (RGUST14) and the S&P 500 (SPX). **Note: Charting all comparable
companies requires two graphs because Bloomberg only allows for eight companies to be compared at a time.

37 | P a g e

38 | P a g e

39 | P a g e

40 | P a g e

Summarized Monthly Price Performance for Stock Universe

For the Past Ten Years
Average Return
Total Return
Standard Dev.
Cf. of Variation

CTL

Top Performance in Stock Universe

Industry Average

Market

0.05%
0.15%
6.07%
6.06%

2.02%
0.77%
6.07%
6.06%

0.63%
0.49%
5.31%
5.28%

0.44%
0.36%
3.93%
3.92%

Source: Bloomberg Terminal. See Appendix for complete table

DuPont Analysis
DuPont Component Analysis
Year
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

PM %
13.49
15.12
15.75
14.07
13.01
13.46
3.73
4.23
-1.32
4.28

PM %
12
4
-11
-8
3
-72
13
-131
324

TATO
0.32x
0.32x
0.34x
0.32x
0.32x
0.32x
0.39x
0.33x
0.34x
0.35x

TATO %
1
6
-7
2
-2
24
-15
3
3

EM
2.146
2.3319
2.4007
2.6094
2.3834
2.2844
2.6955
2.8006
3.0124
3.338

EM %
9
3
9
-9
-4
18
4
8
11

ROE %
9.23
11.35
12.86
11.61
10.01
9.71
3.95
3.95
-1.36
5.06

ROE %
23
13
-10
-14
-3
-59
0
-134
372

DuPont Analysis: Key Driver of Decline

18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

-4.00%
Profit Margin

Return on Equity

41 | P a g e

DuPont Analysis (cont.)

DuPont Analysis: Equity Multiplier

3.60
3.40
3.20
3.00

2.80
2.60
2.40
2.20
2.00
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2013

2014

DuPont Analysis: Total Asset Turnover

0.40x
0.38x
0.36x
0.34x
0.32x
0.30x
0.28x
0.26x

2005

2006

2007

2008

2009

2010

2011

2012

42 | P a g e

DuPont Analysis: Accounting Income

and Cash Flow Decline
30.00%
25.00%

20.00%
15.00%
10.00%
5.00%
0.00%
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

-5.00%
Profit Margin

Free Cash Flow

Key Takeaways:

DuPont analysis reveals that the primary cause of declining return on equity is loss of
net margin
o The acquisition of Qwest led to the 73% decline in profit margin in 2011 due to
CenturyLinks inability to address Qwests cost structure issues within the same
year
o The 131% decrease in profit margin is due to an extraordinary impairment loss of
$1.092b to goodwill on acquired assets. This sends a clear message that the
Qwest merger fails to live up to the expectations of acquirer
Indicates the possibility of future impairments if operations do not see
significant improvement
Declining profitability is problematic given the steady increase in leverage averaging to
5.44% annually
Free cash flow is included in the analysis to show that CenturyLink is not just suffering a
significant decline in accounting income
o Despite the rebound in profit margin in 2014 FCF continues to decline and is
projected by Morgan Stanley to decline by 50% in 2016.
o CTLs main priority needs to be on growing its FCF

43 | P a g e

Altman Z-Score Trend Analysis

Altman Z-Score
Annual Trend
3
2.5
2
1.5
1
0.5
0
2005

2006

2007

2008

Altman Z-Score

2009

2010

2011

2012

2013

2014

Financial Distress Threshold

Key Takeaways:

Declining net margins as a result of acquisitions is the primary driver behind

CenturyLinks trend toward financial distress
o The largest declines in the Altman Z-score take place in 2008 and 2011, both of
which are years that CenturyLink acquired new companies
o CenturyLinks strategy to grow via acquisition is unsustainable if the company
cannot find ways to improve the profit potential of the firms it purchases
o CenturyLink faces the possibility of bankruptcy if it cannot find a ways to
generate more cash flow

44 | P a g e

CenturyLink
COMPANY ANALYSIS AND VALUATION

III. Cost of Capital, Capital Structure

Analysis and Distributions

Table of Contents
I.

The Company, Industry, and Competitors

II.

Financial Performance Analysis

III.

Cost of Capital, Capital Structure Analysis and Distributions

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 45-46

Historical Cost of Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 47
Historical Cost of Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 47-48
Internal Equity Cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 48-49
Capital Structure Weights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 49-50
Forecasted Cost of Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 50-51
Payout Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 51

IV.

Financial Statements Forecasts

V.

Cash Flow Valuation

VI.

Relative (Multiples) Valuation Analysis

VII.

Summary and Conclusions

Executive Summary: Cost of Capital, Capital Structure Analysis and Distributions

In 2014, the capital structure was composed
of 58.16% debt and 41.84% equity.
Cost of Debt
6.58%
Tax Rate
35.6%
After-Tax Cost
4.24%
Cost of Equity
9.87%
WACC
6.59%

Historical Capitalization

42%
58%

Debt
Equity

Cost of outstanding debt at the end

of fiscal year 2014 is 6.58%.

CTLs ten-year historical tax rate of

35.6% yields an after-tax cost of debt of
4.24%.

Combined with its 9.87% cost of

equity, CTLs historical WACC is 6.59%.

CenturyLinks WACC is currently declining from its historical average, due to an increasing
amount of financial leverage.
o Also, the companys WACC is declining due to a low risk-free rate as compared
with the risk-free rate when CTL issued its outstanding debt.
CTLs target capital structure consists of
Target Capital Structure
60% debt and 40% equity.

40%

LT Debt
58%

ST Debt
Equity

Cost of LT Debt
Cost of ST Debt
Tax Rate
After Tax LT Debt
After Tax ST Debt
Cost of Equity
WACC

5.35%
3.72%
35.6%
3.45%
2.4%
9.87%
5.997%

CTLs target capital structure shows

a forecasted WACC of 5.997%.

Forecasted cost of equity is based

upon 2.87% risk-free rate, 1.166 trailing-twelve month beta, and a market risk premium of
6.00%.
Cost of L-T debt is calculated using the 2.87% risk-free rate plus a 2.48% spread due to CTLs
BB rating from Moodys.
Cost of S-T debt is calculated by a prime rate of 3.25% plus a .47% risk-adjusted spread
2%

45 | P a g e

Un-levering and Re-levering Beta

=

+ ( ) ( )

.
= .
+ ( . ) .

= ( + (( + ) ( )))

= . ( + (. . )) = .

Un-levering CTLs beta based on its current capital structure shows an un-levered beta of
0.6153.

o Its re-levered beta, based on a target capital structure of 60% debt and 40% equity
(1.5 D/E ratio), is 1.774.

Internal Cost of Equity

= ( ) +

.
= (
) + % = . %
.

= (
)+
( ( ))
= (

.
) % = . %
(. ( . )

CenturyLinks Payout Policy

CTL is committed to paying the $.54 quarterly dividend and is continually paying the same
quarterly dividend since 2013.
o Its average payout ratio is 53.2% over the last ten years.
o However, in the years 2009-2012, following and preceding CTLs merger with
Qwest, CTLs payout ratio averaged 75.26%.
46 | P a g e

Historical Cost of Debt

For the 2014 fiscal year, CenturyLinks cost of debt can be broken down as shown in the
following table. Total debt includes $20.121 billion of long-term debt as well as a current
portion $550 million and unamortized discounts of $111 million.
CenturyLink Cost of Debt (2014)
Debt

Amount
($mm)

YTM

Weights

Weighted
Avg.

CTL Senior Notes

$7,825

6.26%

0.3765

2.36%

Credit Facility

$725

2.27%

0.0349

0.08%

Term Loan

$380

2.42%

0.0183

0.04%

Qwest Senior Notes

$7311

7.25%

0.3518

2.55%

Qwest Senior Notes

$981

7.13%

0.0472

0.34%

Embarq Senior Notes

$2669

7.54%

0.1284

0.97%

Mtge. Bonds Embarq

$232

7.95%

0.0112

0.09%

Other LT Debt Embarq

$150

9.00%

0.0072

0.06%

Capital Lease & Other

$509

3.50%

0.0245

0.09%

Total Debt

$20,782

1.00

6.58%

CTLs 2014 corporate tax rate was 30.5%, so after tax cost of debt is: 6.58 x (1-.305) = 4.57%.
However, its average tax rate over the past ten years (excluding 2013s tax rate of 207% due to
negative earnings) is 35.6%, which gives an after tax cost of debt of 4.24%.
CenturyLinks capital structure is consistently increasing since its merger with Qwest in 2011,
which caused the company to take on additional debt. CTLs total debt to equity (D/E) ratio in
2014 is 1.39, up from only 0.76 in 2010. Industry D/E is trending downwards with a 2014 ratio
of 2.28 compared to 3.10 in 2010. CTLs debt to equity ratio of 1.39 shows it is currently
financed with 58.16% debt, compared to 67.46% for the industry. However, because the
industry is trending downwards it is assumed solvent companies in the industry are attempting
to target D/E ratios of 1.5, or 60% debt to 40% equity.

Historical Cost of Equity

To calculate CenturyLinks cost of equity, the capital asset pricing model (CAPM) is used to
determine shareholders required return. The equation for CAPM is as follows:
= + ( )

47 | P a g e

 = . % + (. %) = . %
The 30-year US Treasury bond on Friday October 16, 2015 was yielding 2.87%, which is used as
the risk free rate. A long-term bond was chosen because stocks are on-going securities, and
discounted cash flow analysis considers cash flows that are 30 years and further into the future.
CTLs beta of 1.166 is calculated as the monthly stock price for the trailing twelve months (TTM)
regressed against the S&P500. The TTM data was used because CTLs beta is consistently
trending up over the last five years due to increased debt and risk after the merger with Qwest
in 2011. A market risk premium of 6.0% was used based on historical market risk premiums, as
there is no basis to expect any significant changes in the MRP.
However, beta is expected to change as the companys debt to equity ratio changes. Unlevering and re-levering beta with the new capital structure shows the expected beta as CTL
takes on more debt. With an expected D/E ratio of 1.5, beta can be calculated with the
following equations:
=

+ ( ) ( )

.
= .
+ ( . ) .

= ( + (( + ) ( )))

= . ( + (. . )) = .
These formulas show that beta without any financial leverage is 0.6153. However, with 60%
debt (1.5 D/E ratio) CTLs beta rises to 1.774.

Internal Equity Cost

Internal cost of existing equity is calculated as next years dividends divided by price of the
stock, whereas internal cost of new equity is calculated as next years dividends divided by price
times one minus the flotation cost. The equations are as follows:

= ( ) +

.
= (
) + % = . %
.
48 | P a g e


= (
)+
( ( ))
= (

.
) % = . %
(. ( . )

CenturyLinks internal cost of equity of 13.06% for its existing equity based on next years
projected dividends of $2.16 and a 5% growth thereafter. Cost of new equity is calculated by
adding flotation costs to cost of equity, which yields a cost of new equity of 13.48% based on
5% flotation costs.

Weights
Ticker

D/E Ratio

CTL

1.40

ATNI

0.05

CNSL

5.04

FTR

1.58

JCOM

0.70

RNG

0.21

TU

1.57

VG

0.24

ZAYO

3.06

Industry Avg

1.52

CTLs market debt to equity (D/E) ratio is 1.39 according to Thompson One. CTLs book value of
D/E from its 2014 financial statements was 2.338.
The graph and chart above are the companies and the D/E ratios of CTL and its competitors.
The data excludes Cogent Communications (CCOI) because the companies D/E ratios were
much too high. CCOI showed a drop in its stock price and is at risk of being insolvent which put
its D/E ratio to 26.079. CCOI was removed from the data set for being excessively high. West
Corps (WSTC) D/E ratio of -5.5239, which is also removed from the data set for moving the
mean too much.

49 | P a g e

Ultimately, the industry average and the target D/E ratio that estimates CTLs target is 1.50 and
implies CTL is able finance new acquisitions and operations through debt. However, looking at
its interest expense as compared to total revenue, CTL is very conservative with how it acquires
debt in the near future. Despite the high D/E ratio in the industry, CTL cannot ignore basic rules
of solvency and must exercise caution and take on additional debt when revenues rise.

Forecasted Cost of Capital

CTLs weighted average cost of capital (WACC) is calculated by multiplying the cost of each part
by the weight of each part.

Forecasted Cost of Debt

CTLs target weights are 60% debt and 40% equity, similar to its competitors; the companys
target structure of debt is 58% long-term debt, and 2% short-term debt. CTL retired all
preferred stock in 2010 and does not intend to issue more. Moody rates CTL debt at BB and
generates a spread of 2.48% on long-term bonds. The risk free rate is 2.87%, the yield on US
Treasury Bills on October 16, 2015, which shows a cost of long-term of 5.35%, or 3.45% aftertax cost of long-term debt. The companys short-term debt is calculated by the prime rate of
3.25% + a risk-adjusted spread of .47%. This calculates a cost of short-term debt of 3.72%, or
2.40% after tax cost of short-term debt.

= (. % + . %) ( . ) = . %
= (. % + . %) ( . ) = . %

Forecasted Cost of Equity

CTLs cost of equity was calculated using the capital asset pricing model (CAPM). The equation
is
= +
= . % + . % = . %

The risk free rate is the 2.87%, the market risk premium is 6%, and the trailing twelve month
(TTM) beta for CTL is 1.166. The TTM beta best approximates its beta is because it captures a
data set that minimizes noise of daily returns of closer betas and represents the current
volatility better than longer views. The Qwest merger caused increased volatility because of
50 | P a g e

predictions while before that acquisition CTLs beta is much less correlated to the market. Once
calculated the cost of equity becomes 9.87%.
= + +
= . . % + . . % + . . % = . %
Once combined CTLs forecasted total cost of capital becomes 5.997%. It is forecasted that
CTLs capital structure is not expected to change significantly in the short term because CTL is
close to the target capital structure and its interest expense compared to gross profit is high.

Payout Policy
CTL is committed to paying the $0.54 quarterly dividend and is continually paying the same
quarterly dividend since 2013. CTL is showing resilience to changing that dividend because of
falling stock prices. CTLs payout ratio proves to be somewhat chaotic between years. Its
average is 53.2% over the last ten years. However, in the years 2009-2012, following and
preceding CTLs merger with Qwest, CTL consistently paid out 75.26%.

51 | P a g e

CenturyLink
COMPANY ANALYSIS AND VALUATION

IV. Financial Statement Forecasts

Table of Contents
I.

The Company, Industry, and Competitors

II.

Financial Performance Analysis

III.

Cost of Capital, Capital Structure Analysis and Distributions

IV.

Financial Statements Forecasts

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 52-53

Pro Forma & Projected Financials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 54-59
Growth and Fade Rate Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 60-70
Projected Financial Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 71-72
Projected DuPont Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 73-75
Projected Altman Z-Score Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 76
Sensitivity & Scenario Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 77-80

V.

Cash Flow Valuation

VI.

Relative (Multiples) Valuation Analysis

VII.

Summary and Conclusions

Pro Forma & Projected Financial Statements

Historical Income Statements
2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

Revenue
Costs of goods sold
Sales, general & administrative
expense
Depreciation
Operating profit

18,031
7,831
3,311

18,095
7,492
3,464

18,376
7,635
3,115

15,351
6,258
2,575

7,042
2,366
1,059

4,974
1,752
934

2,600
955
399

2,656
935
389

2,448
880
369

2,479
822
389

4,428
2,461

4,541
2,598

4,780
2,846

4,026
2,492

1,434
2,183

975
1,314

524
721

536
796

524
675

532
736

Interest expense
Interest income
Non-operating income
Earnings before taxes

1,358
0
0
1,110

1,339
0
0
224

1,362
0
(1)
1,250

1,097
0
(2)
948

557
0
(7)
1,532

370
0
(1)
815

202
0
0
560

213
0
0
619

196
0
0
591

202
4
(8)
533

Tax expense
Net income before extra. items

338
772

463
(239)

473
777

375
573

583
949

302
513

194
366

201
418

221
370

203
330

After-tax extraordinary income

Net income

0
772

0
(239)

(1)
776

(2)
571

(7)
942

135
647

0
366

0
418

0
370

(5)
325

0
1,228
(456)

0
(1,301)
1,062

0
(1,811)
2,587

0
(1,556)
2,127

(0)
(878)
1,820

(0)
(561)
1,208

(0)
(220)
586

(0)
(29)
447

(0)
(29)
399

(0)
(31)
357

Dividends-- preferred
Dividends-- common
Additions to RE

54 | P a g e

Projected Income Statements

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Revenue

18,031

17,967

17,911

17,871

17,866

17,940

18,192

18,446

18,705

18,966

Costs of goods sold

7,831

7,803

7,482

7,285

7,174

7,204

7,305

7,407

7,511

7,616

SGA

3,311

3,299

3,165

3,083

3,037

3,050

3,093

3,136

3,180

3,224

Depreciation
Operating profit

4,428
2,461

4,359
2,505

4,102
3,162

3,917
3,585

3,822
3,832

3,870
3,817

3,793
4,001

3,847
4,057

3,900
4,113

3,955
4,171

Interest expense

1,358

1,454

1,753

1,755

1,747

1,741

1,757

1,752

1,777

1,775

Interest income

60

65

72

77

78

80

76

81

0
1,110

0
1,052

0
1,468

0
1,896

0
2,157

0
2,152

0
2,322

0
2,384

0
2,412

0
2,477

338
772

374
677

523
945

675
1,221

768
1,389

766
1,386

827
1,495

849
1,536

859
1,553

882
1,595

0
772

0
677

0
945

0
1,221

0
1,389

0
1,386

0
1,495

0
1,536

0
1,553

0
1,595

Non-operating income
Earnings before taxes
Tax expense
Net income before
extraordinary items
After-tax extraordinary income
Net income
Dividends-- preferred

Dividends-- common
Additions to RE

1,228
(456)

1,224
(546)

1,220
(274)

1,217
4

1,217
172

1,222
164

1,239
256

1,256
279

1,274
280

1,292
304

55 | P a g e

Projected Income Statements (Cont.)

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Revenue
Costs of goods sold
SGA
Depreciation

19,232
7,723
3,269
4,010

19,501
7,831
3,315
4,066

19,774
7,941
3,362
4,123

20,051
8,052
3,409
4,181

20,332
8,164
3,456
4,240

20,616
8,279
3,505
4,299

20,905
8,395
3,554
4,359

21,198
8,512
3,604
4,420

21,494
8,631
3,654
4,482

21,795
8,752
3,705
4,545

22,101
8,875
3,757
4,609

Operating profit
Interest expense
Interest income
Non-operating income

4,229
1,725
110
0

4,289
1,544
317
0

4,349
1,566
342
0

4,410
1,588
369
0

4,471
1,610
396
0

4,534
1,632
424
0

4,597
1,655
454
0

4,662
1,678
485
0

4,727
1,701
517
0

4,793
1,725
550
0

4,860
1,749
584
0

Earnings before taxes

Tax expense

2,614
931

3,061
1,090

3,125
1,113

3,191
1,136

3,258
1,160

3,326
1,184

3,397
1,209

3,469
1,235

3,543
1,261

3,618
1,288

3,696
1,316

Net income before extraordinary items

After-tax extraordinary income

1,684
0

1,972
0

2,013
0

2,055
0

2,098
0

2,142
0

2,187
0

2,234
0

2,281
0

2,330
0

2,380
0

1,684

1,972

2,013

2,055

2,098

2,142

2,187

2,234

2,281

2,330

2,380

0
1,310

0
1,328

0
1,347

0
1,366

0
1,385

0
1,404

0
1,424

0
1,444

0
1,464

0
1,484

0
1,505

374

643

666

689

713

738

764

790

818

846

875

Net income
Dividends-- preferred
Dividends-- common
Additions to RE

56 | P a g e

Historical Balance Sheets

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

Assets
Cash
Inventory
Accounts receivable
Other short-term operating assets
Short-term investments

128
132
1988
1328
0

168
167
1977
1595
0

211
125
1959
1318
0

128
0
1979
1416
0

173
33
815
122
0

162
36
801
125
0

243
9
230
73
0

34
9
223
26
0

26
7
227
30
0

159
7
237
20
0

Total current assets

Net plant, property, & equipment
Other long-term operating assets
Long-term investments

3576
18433
27295
843

3907
18646
28411
823

3613
19032
30579
796

3523
19436
32324
856

1143
8754
11778
363

1124
9097
11965
377

555
2896
4463
340

292
3108
4520
264

290
3109
3781
261

423
3304
3758
277

50147

51787

54020

56139

22038

22563

8254

8185

7441

7763

Liabilities and Equity

Accounts payable
Accruals
Other operating current liabilities
All short-term debt

1226
950
0
1742

1111
989
0
2309

1207
1039
0
2349

1399
1017
0
1603

300
482
0
428

395
747
0
959

135
243
0
180

120
224
0
498

129
214
0
374

104
171
0
471

Total current liabilities

Long-term debt
Deferred taxes
Preferred stock
Other long-term liabilities

3918
21368
4030
0
5808

4409
21385
4753
0
4049

4595
20648
3644
0
5844

4019
22615
3823
0
4855

1210
7506
2369
0
1312

2100
7254
2257
0
1491

558
3331
854
0
348

842
2799
811
7
323

717
2486
673
7
373

746
2468
670
8
261

Total liabilities
Par plus PIC Less treasury
Retained earnings

35124
14876
147

34596
17125
66

34731
18004
1285

35312
18508
2319

12397
6339
3302

13102
6228
3233

5091
17
3146

4782
157
3245

4258
33
3151

4153
251
3358

Total common equity

15023

17191

19289

20827

9641

9461

3163

3402

3184

3609

Total liabilities and equity

50147

51787

54020

56139

22038

22563

8254

8185

7441

7763

Total assets

57 | P a g e

Projected Balance Sheets

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Assets
Cash
Inventory
Accounts receivable
Other short-term operating assets
Short-term investments

128
132
1,988
1,328
0

128
132
1,981
1,323
4,579

127
131
1,975
1,397
5,025

127
131
1,970
1,394
5,516

127
131
1,970
1,394
5,907

127
131
1,978
1,399
5,995

129
133
2,006
1,419
6,161

131
135
2,034
1,439
5,787

133
137
2,062
1,459
5,934

135
139
2,091
1,479
6,104

Total current assets

Net plant, property, & equipment
Other long-term operating assets
Long-term investments

3,576
18,433
27,295
843

8,142
18,147
27,198
840

8,655
18,174
26,168
837

9,138
18,320
25,167
836

9,528
18,730
24,218
835

9,631
19,735
23,372
839

9,848
20,011
22,740
851

9,525
20,291
23,058
862

9,725
20,575
23,381
874

9,948
20,863
23,708
887

50,147

54,327

53,834

53,459

53,310

53,576

53,449

53,737

54,556

55,406

Liabilities and Equity

Accounts payable
Accruals
Other operating current liabilities
All short-term debt

1,226
950
0
1,742

1,222
947
0
2,225

1,218
944
0
2,002

1,215
942
0
1,771

1,215
941
0
1,547

1,220
945
0
1,344

1,237
958
0
1,128

1,254
972
0
933

1,272
985
0
946

1,290
999
0
959

Total current liabilities

Long-term debt
Deferred taxes
Preferred stock
Other long-term liabilities

3,918
21,368
4,030
0
5,808

4,394
25,702
3,967
0
5,787

4,163
25,855
3,973
0
5,640

3,928
25,867
4,005
0
5,453

3,703
25,916
4,095
0
5,217

3,509
26,290
4,315
0
4,921

3,323
26,399
4,375
0
4,554

3,159
27,043
4,436
0
4,021

3,203
27,420
4,498
0
4,077

3,248
27,802
4,561
0
4,134

Total liabilities
Par plus PIC Less treasury
Retained earnings

35,124
14,876
147

39,851
14,876
(399)

39,632
14,876
(674)

39,253
14,876
(670)

38,932
14,876
(498)

39,034
14,876
(334)

38,650
14,876
(77)

38,659
14,876
202

39,198
14,876
482

39,745
14,876
785

Total common equity

15,023

14,477

14,202

14,206

14,378

14,542

14,799

15,078

15,358

15,661

Total liabilities and equity

50,147

54,327

53,834

53,459

53,310

53,576

53,449

53,737

54,556

55,406

Total Assets

58 | P a g e

Projected Balance Sheets (Cont.)

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Cash

137

138

140

142

144

146

148

150

153

155

157

Inventory

141

143

145

147

149

151

153

155

157

160

162

Accounts receivable

2,120

2,150

2,180

2,211

2,242

2,273

2,305

2,337

2,370

2,403

2,437

Other short-term operating assets

1,500

1,521

1,542

1,564

1,586

1,608

1,631

1,653

1,677

1,700

1,724

Short-term investments

6,342

6,847

7,373

7,920

8,489

9,081

9,696

10,335

10,999

11,689

12,406

Total current assets

10,240

10,800

11,381

11,984

12,610

13,259

13,932

14,631

15,355

16,107

16,885

Net plant, property, & equipment

21,155

21,451

21,752

22,056

22,365

22,678

22,996

23,318

23,644

23,975

24,311

Other long-term operating assets

24,040

24,377

24,718

25,064

25,415

25,771

26,131

26,497

26,868

27,244

27,626

899

912

925

937

951

964

977

991

1,005

1,019

1,033

56,334

57,539

58,775

60,042

61,340

62,672

64,037

65,437

66,872

68,345

69,855

Accounts payable

1,308

1,326

1,345

1,363

1,382

1,402

1,421

1,441

1,461

1,482

1,503

Accruals

1,013

1,027

1,042

1,056

1,071

1,086

1,101

1,117

1,132

1,148

1,164

972

986

999

1,013

1,027

1,042

1,056

1,071

1,086

1,101

1,116

3,293

3,339

3,386

3,433

3,481

3,530

3,579

3,629

3,680

3,731

3,783

Long-term debt

28,189

28,581

28,979

29,382

29,791

30,205

30,625

31,050

31,482

31,919

32,362

Deferred taxes

4,625

4,690

4,756

4,822

4,890

4,958

5,028

5,098

5,169

5,242

5,315

Preferred stock

4,192

4,251

4,310

4,371

4,432

4,494

4,557

4,621

4,685

4,751

4,818

40,299

40,861

41,430

42,008

42,593

43,187

43,788

44,398

45,016

45,643

46,278

Par plus PIC Less treasury

14,876

14,876

14,876

14,876

14,876

14,876

14,876

14,876

14,876

14,876

14,876

Retained earnings

1,159

1,802

2,468

3,158

3,871

4,609

5,373

6,163

6,980

7,826

8,701

Total common equity

16,035

16,678

17,344

18,034

18,747

19,485

20,249

21,039

21,856

22,702

23,577

Total liabilities and equity

56,334

57,539

58,775

60,042

61,340

62,672

64,037

65,437

66,872

68,345

69,855

Assets

Long-term investments
Total Assets
Liabilities and Equity

Other operating current liabilities

All short-term debt
Total current liabilities

Other long-term liabilities

Total liabilities

59 | P a g e

Growth and Fade Rate Analysis

Sales Growth Rate
Since 2005, CenturyLink is
140.00%
averaging 30.4% sales growth due
120.00%
to its M&A of Savvis, Qwest, and
100.00%
Embarq, which increased revenue
80.00%
from $2.6 billion in 2008 to $18.4
60.00%
40.00%
billion in 2012. However, this sales
20.00%
growth is not expected to continue
0.00%
as CTL is nearing its target capital
2005
2010
2015
2020
2025
2030
2035
2040
-20.00%2000
structure, leaving no room for
additional debt to finance M&A. AT&T recently reconsolidated in 2007 and is growing at an
average annual rate of 1.56% since its reconsolidation. Based on AT&Ts average growth rate,
CTLs growth rate is expected to increase at an average rate of 1.4%. The telecommunications
industry is projected to decline at an average annual rate of 1.4% from 2015 to 2020. A fade
rate of -.80 is used because of CTLs 2014 sales growth of -.35%. CenturyLink is expected to
experience negative sales growth until 2018, at which point its growth is forecasted to quickly
increase to the 1.4% long-term growth rate.
Sales growth rate

Historical

Fade Rate Analysis: CenturyLinks convergence to a long-term growth rate of 1.4% annum is
expected to be slower from 2016-2018 due to managements transition to the Data Hosting
segment as the primary driver of profitability/growth in the firm. Hence, the fade rate of -0.80
is used in the model to reflect this trend of slower convergence from 2016 to 2018.

COGS/Sales
CTLs ten-year historical average of
50.00%
COGS as a percent of sales is
45.00%
37.7%, however, its COGS/Sales
40.00%
35.00%
spiked to 41.55% subsequent to
30.00%
the merger with Qwest. The
25.00%
20.00%
increase in COGS as a percent of
15.00%
sales is due to CTLs entrance into
10.00%
5.00%
more competitive urban markets
0.00%
where the company is now
2000
2005
2010
2015
2020
2025
2030
2035
2040
competing with Comcast and Cox.
This increase in competition is estimated to keep CTLs cost of revenue above 40%, so expected
long-term cost of revenue is 40.16%. As CTL reaches positive sales growth in 2019 the company
is able to use its assets more efficiently to generate sales, which is expected to drive cost of
COGS / Sales

Historical

60 | P a g e

revenue down to 40.16% from its current rate of 43.4%. The fade rate of .50 is used because
cost of revenue is expected to gradually decline to 40.16% in 2019 when CTL reaches positive
sales growth.

Fade Rate Analysis: CenturyLinks cost of revenue is forecasted to be 40.16% fairly quickly as
the vertical marketing retraining program comes to an end in 2015 and sales begin to increases
across all segments most notably data Hosting. In addition to the short period of three years
until long-term convergence, a fade rate of 0.50 is used to reflect a sharp decline in COGS /
Sales in 2016 and 2017.
SGA/Sales
CenturyLinks SGA/sales is steadily
25.00%
increasing since its acquisition of
Embarq in 2009 and merger with
20.00%
Qwest in 2011. CTL is currently
15.00%
wrapping up its retraining program
which it initiated due to high
10.00%
employee growth from its M&A.
5.00%
When CTL finishes its retraining
program it is forecasted that the
0.00%
2000
2005
2010
2015
2020
2025
2030
2035
2040
companys SGA is going to return
to 17%, slightly above the ten-year average of 16.6%. A fade rate of .50 shows that the
companys cost of SGA is projected to sharply decline in the next three years as it finishes the
retraining program.
SGA / Sales

Historical

Fade Rate Analysis: Similar to cost of revenue, SGA is projected to swiftly converge to its longterm proportion of sales given that the marketing retraining program ends in 2015. In addition
to its three-year term until convergence, a fade rate of 0.50 is used to coincide with the sharp
decline in COGS/Sales in 2016 and 2017.
Depreciation/Net PPE
Depreciation / Net PPE

30.00%

Historical

25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2000

2005

2010

2015

2020

2025

2030

2035

2040

CTLs depreciation is forecasted to

remain around its ten-year
average of 18.96% as CTL is not
expected to see significant growth
in revenue nor acquire firms with a
lot of tangible assets in place.
Therefore, CTLs depreciation as a
percent of PPE is expected to
decrease from the current rate of
24.02% to the companys historical
61 | P a g e

average of 18.96%. Depreciation is forecasted to reach long-term levels in five years with a fade
rate of .20. The fade rate shows that CTLs depreciation is expected to decline quickly in the
near future and even out as it nears the long-term average.

Fade Rate Analysis: The rate at which CenturyLinks depreciation is forecasted to fall back to
its historical average is linear as there is no reason to assume that it occurrence is slower or
faster. Implicit in the assumption that Depreciation/Net PPE returns to its historical average is
the belief that bonus depreciation is expected to continue indefinitely until new information
demonstrates otherwise.
Cash/Sales
Historically, CenturyLink runs its
10.00%
business with minimal cash on the
9.00%
books, with average cash to sales
8.00%
percentage of 2.7%. The average is
7.00%
6.00%
brought up by 2005 and 2008
5.00%
when CTL held unusually large
4.00%
3.00%
amounts of cash. CTLs most
2.00%
recent cash to sales is .71% with a
1.00%
0.00%
trend of only .1%. Since there is no
2000
2005
2010
2015
2020
2025
2030
2035
2040
clear trend in CTLs cash to sales it
is forecasted that .71% is the companys long-term rate for cash to sales.
Cash / Sales

Historical

Fade Rate Analysis: The fade rate for cash/sales is irrelevant as the period until the long-term
proportion of sales is zero years. In other words, cash is already at its long-term proportion of
sales.
Inventory/Sales
As CTL is in the services industry
1.00%
the company does not hold a lot of
0.90%
inventory, which is shown by its
0.80%
ten-year average of .47%
0.70%
0.60%
inventory to sales. The companys
0.50%
2014 inventory to sales was .7%,
0.40%
0.30%
which increased to above average
0.20%
subsequent to its merger with
0.10%
0.00%
Qwest. The merger with Qwest
2000
2005
2010
2015
2020
2025
2030
2035
2040
required CTL to hold more
inventory due to its entrance into more competitive markets, especially in the TV services
sector. CTL is forecasted to hold inventory consistent with its 2014 inventory to sales of .73%.
Inventory/ Sales

Historical

62 | P a g e

Fade Rate Analysis: The fade rate for inventory/sales is irrelevant as the period until the long
term proportion of sales is zero years. In other words, inventory is already at its long-term
proportion of sales.
Accounts Receivable/Sales

18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2000

Accts. rec. / Sales

CTLs accounts receivable to sales

is consistently around 10% to 12%
with a ten-year historical average
of 10.93%. Its A/R to sales is not
projected to deviate from its
historical average, so a long term
rate of 10.93% A/R to sales is used.

Historical

Fade Rate Analysis: The fade rate

for accounts. rec./sales is
irrelevant as the period until the long term proportion of sales is zero years. In other words,
accounts receivable is already at its long-term proportion of sales.
2005

2010

2015

2020

2025

2030

2035

2040

Other Short Term Op Assets/Sales

Other short term operating assets
to sales is 3.8% based on the tenHistorical
10.00%
9.00%
year historical average, however,
8.00%
this ratio increased significantly
7.00%
6.00%
subsequent to the merger with
5.00%
Qwest in 2011. For 2014, CTLs
4.00%
3.00%
other short term operating assets
2.00%
to sales is 7.37% with a trend of
1.00%
0.00%
9.2%. CTLs average short term
2000
2005
2010
2015
2020
2025
2030
2035
2040
operating assets to sales is
averaging 7.8% post merger with Qwest. As such, it is forecasted that the long-term rate is
7.8%, which is expected to be reached in one year with a fade rate of one.
Other short term operating assets/Sales

Fade Rate Analysis: Given that the period to convergence with the long-term proportion of
sales is one year the fade rate is irrelevant.

63 | P a g e

Net PPE/Sales
CTLs net PPE to sales historical
200.00%
average over ten-years is 123.1%
180.00%
with a trend of 105.6% and a 2014
160.00%
rate of 102.2%. The company is
140.00%
120.00%
increasingly generating more sales
100.00%
relative to net PPE since the
80.00%
60.00%
merger with Qwest, which is
40.00%
causing net PPE to sales to trend
20.00%
0.00%
downwards. It is forecasted that
2000
2005
2010
2015
2020
2025
2030
2035
2040
CTLs long-term net PPE/sales is
103% and the company is expected to reach that rate in four years time with a -.80 fade rate as
the current rate of 102.2% is estimated to slowly converge to 103%.
Net PPE / Sales

Historical

Fade Rate Analysis: Since CenturyLink is projected to continue to acquire non capital intensive
companies and these acquisitions are expected to boost growth in revenue, it is expected the
net effect on Net PPE/Sales to balance out at 103% in five years. Furthermore, it is forecasted
that growth in Property, Plant, and Equipment to exceed the growth in revenue until
convergence, hence a fade rate of 0.80 is used to model Net PPE/Sales capping out at 103%
quickly.
Other Long-term Assets/Sales
CTLs other long-term operating
assets to sales is averaging 174.1%
300.00%
over the last ten-years with a 2014
250.00%
rate of 151.4%. CenturyLink
200.00%
includes goodwill in its other long150.00%
term operating assets, and a 2013
100.00%
impairment of goodwill in the
50.00%
amount of $1.092 billion caused
0.00%
the companys other long-term
2000
2005
2010
2015
2020
2025
2030
2035
2040
operating assets to sales to
decreases. CTL is forecasted to impair more goodwill in the future due to poor performance
following the merger with Qwest; rather than adding synergies, CTL entered a more
competitive market which caused profitability to drop by 270%. Since CTL is expected to write
down goodwill, the companys long-term rate for other long-term operating assets to sales is
forecasted to be 131%. This long-term rate of 131% is projected to take effect in five years with
a fade rate of zero.
Other long-term op. A. / Sales
Historical

64 | P a g e

Fade Rate Analysis: It is expected that there is continued impairment of CenturyLinks goodwill
in the next five years but dont know precisely when this impairment occurs. Hence, a fade rate
of 0.00 is used to impair goodwill linearly akin to depreciating an asset.
Accts Payable/Sales
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2000

Accts. pay./ Sales

2005

2010

2015

Historical

2020

2025

2030

2035

2040

CTLs ten-year average accounts

payable to sales are 6% with the
most recent year (2014) at 6.8%. It
is not expected that CTLs account
payable to change apart from
normal annual fluctuations, so the
long-term rate is assumed to be
6%, which the company is
expected to reach in one year with
a fade rate of zero.

Fade Rate Analysis: The fade rate for accounts pay./sales is irrelevant as the period until the
long term proportion of sales is zero years. In other words, accounts payable is already at its
long-term proportion of sales.
Deferred Taxes/Net PPE
Deferred taxes/Net PPE

35.00%

Historical

30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2000

2005

2010

2015

2020

2025

2030

2035

2040

CTLs deferred taxes as a

percentage of net PPE are 23.6%
over the last ten-year period, and
21.86% in 2014. Forecasting shows
that CTL is expected remain
around its current deferred tax to
net PPE rate of 21.86% as congress
is expected to continue with bonus
depreciation and CTL maintains its
tax deferments.

Fade Rate Analysis: The fade rate for deferred taxes is irrelevant as the period until the long
term proportion of sales is zero years. In other words, deferred taxes is already at its long-term
proportion of sales.

65 | P a g e

Marginal Tax Rate

250.00%

Marginal tax rate

Historical

CTLs ten-year historical average

marginal tax rate is 53.2%,
which is significantly skewed
150.00%
due to a 2013 tax rate of 207%
100.00%
caused by negative earnings. In
50.00%
2014, CTL paid taxes of only
30.5%, which is below its
0.00%
2000
2005
2010
2015
2020
2025
2030
2035
2040
average tax rate of 35.6% when
the outlier (2013 fiscal year) is taken out of the ten-year historical average. As such,
CenturyLinks forecasted long-term marginal tax rate is 35.6% since it is not expected for CTL to
continuously pay a 207% marginal tax rate. CTL is expected to reach its long-term marginal tax
rate in 2015 with a fade rate of zero.
200.00%

Fade Rate Analysis: The fade rate for marginal tax rate is irrelevant as the period until long
term convergence is zero years. In other words, the marginal tax rate is already at its long term
value.

Other Long-term Liabilities/Sales

CTLs ten-year historical average
other long-term liabilities to sales
30.00%
is 21.8% with a most recent rate of
25.00%
32.21%. This rate is trending
20.00%
upwards since the merger with
15.00%
Qwest due to the need to take on
10.00%
more debt and liabilities to fund
5.00%
the merger. As CTL is close to its
0.00%
target capital structure it is
2000
2005
2010
2015
2020
2025
2030
2035
2040
forecasted that other long-term
liabilities is going to trend back down to its historical average of 21.8%. CTL is expected to reach
its long-term rate in six years with a fade rate of -.30, which shows CTL is forecasted to trend
towards average over the next four years, after which it the ratio is expected to sharply decline
to the long-term rate of 21.8%.
Other long-term liab. / Sales

35.00%

Historical

Fade Rate Analysis: The fade rate for other long-term liabilities/sales is irrelevant given that
the proportion is currently at its long-term proportion of 0%.

66 | P a g e

Accruals/Sales
The fade rate for accruals/sales is
irrelevant as the period until the
long term proportion of sales is
zero years. In other words,
accruals is already at its long-term
proportion of sales.

Average Tax Rate:

The fade rate for average tax rate
is irrelevant as the period until the
long term proportion of sales is
zero years. In other words, the
average tax rate is already at its
long-term proportion of sales.

Dividend Growth Rate

A fade rate of -0.10 is used for the
convergence to a steady growth
rate in CenturyLinks dividend in
order to capture the low expected
payout in 2016. This low payout is
caused by the $931mm in tax
deferments CenturyLink is most
likely going to pay that year.

67 | P a g e

Long-Term Debt/Market Value

There is no justifiable reason for
the convergence to steady state
long-term debt/market value to
occur at a slower/faster rate than
linear. Hence, a fade rate of zero
is used to capture a linear trend.

Coupon Rate on Preferred

Stock
The fade rate for the coupon on
preferred stock is irrelevant given
the assumption that CenturyLink
is no longer expected to maintain
preferred stock in its
capitalization.

Perm. Component of ShortTerm Debt/MV

There is no justifiable reason for
the convergence to the long-term
proportion of permanent shortterm debt/MV to occur at a
slower or faster rate than linear.
Hence, a fade rate of zero is used
to capture a linear trend.

68 | P a g e

Non-op. Inc./Sales
The fade rate is irrelevant given
that the proportion is currently at
its long-term value of 0%.

Extraordinary Income/Sales
Since extraordinary income is
difficult to forecast accurately to
any degree of accuracy, its
average value is assumed to
equal zero.

Long-term Investments/Sales:
The fade rate for long-term
investments/sales is irrelevant
given that the proportion is
currently at its long-term
proportion of 0%.

69 | P a g e

Short-term Interest rates

Since the American economy is
sluggishly recovering, a fade rate
of -2.00 is used to reflect the
assumption that short term
interest rates wont recover to its
pre-financial crisis level for
another ten years.

Interest Rate on All Current Debt

The fade rate for the interest rate
on all current debt is irrelevant
given that current interest rate is
already at its long-term value.

70 | P a g e

Projected Financial Ratios

This section demonstrates the results of the fade decisions on CTLs future financial ratios. Each
graph predicts 10 years into the future to a date of 1/1/2025. This date gives the best time
frame because it falls after the time CTL is expected to go into horizon value.

Pro Forma Leverage Ratios

3.000

2.500
2.000

1.500
1.000

0.500
0.000

Interest Coverage

D/E

This graph observes a decreasing Debt to Equity ratio as CTL tends to reach its projected target.
Lowering debt means its interest coverage ratio gets stronger as earnings before taxes out
paces interest expense. The key take-away here is CTL lowers leverage and increases overall
firm security as time goes on.

Pro Forma Liquidity Ratios

3.500
3.000
2.500
2.000
1.500
1.000
0.500
0.000

Current Ratio

Quick Ratio

Cash Ratio

71 | P a g e

This graph shows CTLs rise from relative uncertainty about covering current liabilities to a very
confident position. The current and quick ratios remain extremely close because CTL does not
carry much inventory. This graph also demonstrates the increase coverage of the cash ratio.
The fade rate for cash remains constant over this time period but, CTL becomes more efficient
with its current liabilities. The key take-away here is CTL becomes more able to cover current
liabilities as time goes on.

Pro Forma Profitability Ratios

0.450
0.400
0.350
0.300
0.250
0.200
0.150
0.100
0.050
0.000

Gross Margin

Operating Margin

Net Margin

This graph explores CTLs future profitability. Its gross margin increases within the next 4 years
but, eventually reaches a constant ratio in 5 years. Proportionally its operating margin increases
and holds itself constant at 5 years as well. This phenomena occurs because CTL settles into the
merger with Qwest and becomes more efficient with its operations as time goes on. Most
importantly the net margin continues to increase beyond gross and operating margins as
management becomes leaner and overlap roles get eliminated from its huge mergers.

72 | P a g e

Projected DuPont Analysis

Projected DuPont Component Analysis

Year
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035

PM %
1.54
1.23
1.85
2.40
2.80
2.98
3.18
3.21
3.18
3.20
3.31
3.75
3.74
3.73
3.73
3.72
3.71
3.70
3.70
3.69
3.68

PM %
-20.15
50.40
30.01
16.56
6.39
6.70
0.79
-0.78
0.75
3.16
13.37
-0.19
-0.19
-0.19
-0.19
-0.19
-0.19
-0.19
-0.19
-0.19

TATO
0.36x
0.34x
0.34x
0.34x
0.34x
0.34x
0.34x
0.34x
0.34x
0.34x
0.34x
0.34x
0.33x
0.33x
0.33x
0.32x
0.32x
0.32x
0.31x
0.31x
0.30x

TATO %
-4.48
-0.16
-0.18
-0.16
0.06
0.67
0.12
-0.43
-0.46
-0.57
-1.03
-1.04
-1.05
-1.06
-1.07
-1.07
-1.08
-1.09
-1.10
-1.11

EM
3.34
3.62
3.68
3.67
3.62
3.55
3.48
3.42
3.39
3.35
3.31
3.23
3.16
3.09
3.03
2.96
2.90
2.85
2.79
2.74
2.69

EM %
8.52
1.65
-0.25
-1.49
-1.84
-2.11
-1.60
-0.98
-1.04
-1.28
-2.28
-2.23
-2.17
-2.12
-2.06
-2.01
-1.97
-1.92
-1.88
-1.83

ROE %
1.85
1.53
2.33
3.02
3.46
3.62
3.81
3.78
3.70
3.67
3.71
4.07
3.93
3.80
3.67
3.55
3.44
3.33
3.22
3.12
3.02

ROE %
-17.23
52.64
29.44
14.64
4.48
5.15
-0.71
-2.18
-0.76
1.26
9.63
-3.43
-3.38
-3.34
-3.29
-3.25
-3.21
-3.17
-3.14
-3.10

Key Driver of Return on Equity

4.50%
4.00%
3.50%
3.00%

2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2015

2017

2019

2021

2023

Profit Margin

2025

2027

2029

2031

2033

2035

Return on Equity

73 | P a g e

CTL: Projected Equity Multiplier

4.00
3.80
3.60
3.40
3.20
3.00

2.80
2.60
2.40
2.20
2.00
2014

2019

2024

2029

2034

CTL: Projected Total Asset Turnover

0.38x

0.36x
0.34x
0.32x
0.30x
0.28x
0.26x
0.24x
0.22x
0.20x
2014

2019

2024

2029

2034

74 | P a g e

DuPont Analysis: Accounting Income vs Free

Cash Flow
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2014

2019

2024
Profit Margin

2029

2034

FCF Margin

Key Takeaways:

Projected profit margin is the key driver behind the growth in return on equity up until
2026, whereas the projected equity multiplier is the key driver behind return on
equitys decline from 2026 onwards
o The increase in profit margin from 2015 to 2026 captures the improvement in
current profitability as CenturyLink grows into its niche market for data hosting
services.
The decline from 2026 to 2035 is reflects how competitive pressures in
the IT industry are expected to steadily reduce CenturyLinks
profitability in the long run
o The steady decrease in the equity multiplier is caused by the growth in total
assets exceeding the growth in equity once CenturyLink hits its target weight of
debt
Free cash flow profitability is projected to peak in 2019 and to continuously decay in
the long run. This fully captures three important events in CenturyLinks near future:
o The ultimate decline of the companys legacy services for both the consumer and
business markets
o The market saturation of wireless services and demand for broadband services
o The maturation of the IT industry in which CTL competes for majority of the
companys revenue in the long run

75 | P a g e

Projected Altman Z-Score Trend Analysis

CTL: Altman Z-Score

2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Z-Score

Financial Distress Cutoff

Key Takeaways:

Despite CenturyLinks projected improvement in profitability the firm still remains in

danger of bankruptcy.
o Furthermore, CenturyLink is not expected to exceed the financial distress cutoff
without significant improvement to its long run profitability and/or establishing
a significant competitive advantage for the long run

76 | P a g e

Sensitivity and Scenario Analysis of Key Drivers

Sales Growth:
Base Case: Same assumption used in the model.
Sales growth rate

30.4%

34.1%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

-0.4%

-0.35%

$33.48

6.0%

1.40%

-0.80

Best Case Scenario: CenturyLink becomes a serious competitor in the growing IT sector and achieves a
sales growth rate of 2.5% by increasing its market share in this sector.
Sales growth rate

30.4%

34.1%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

-0.4%

-0.35%

$35.95

6.2%

2.5%

-0.80

Worst Case Scenario: CenturyLink fails to realize potential of its Data Hosting segment and contracts at
a long-term rate of -2.5% until being acquired.
Sales growth rate

30.4%

34.1%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

-0.4%

-0.35%

$28.07

5.4%

-2.5%

-0.80

40.16%

0.50

COGS/Sales:
Base Case: Same assumption used in the model.
COGS / Sales

37.7%

43.5%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

43.4%

43.43%

$33.48

6.0%

77 | P a g e

Best Case Scenario: CenturyLink is able to reduce its cost of revenue to its ten-year historical average
before the companys merger with Qwest. However, this is an unlikely scenario since CTL entered into
more competitive markets after merging with Qwest.
COGS / Sales

37.7%

43.5%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

43.4%

43.43%

$42.85

6.7%

37.7%

0.50

Worst Case Scenario: Although CenturyLinks cost of revenue is trending down subsequent to its merger
with Qwest, it is possible that CTL is unable to decrease its cost of revenue below its most recent rate of
43.4%.
COGS / Sales

37.7%

43.5%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

43.4%

43.43%

$20.94

5.2%

43.5%

0.50

17.00%

0.50

SGA/Sales:
Base Case: Same assumption used in the model.
SGA / Sales

16.6%

18.7%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

18.4%

18.36%

$33.48

6.0%

Best Case Scenario: CenturyLink is able to reduce its selling, general, and administration expense to its
ten-year historical average prior to the merger with Qwest as CTL wraps up its employee-retraining
program.
SGA / Sales

16.6%

18.7%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

18.4%

18.36%

$35.05

6.2%

16.6%

0.50

78 | P a g e

Worst Case Scenario: CTLs SGA expense remains constant at its most recent value of 18.36% due to the
possibility that the company requires a higher percent of SGA to sales due to its entrance into more
competitive markets since its merger with Qwest.
SGA / Sales

16.6%

18.7%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

18.4%

18.36%

18.4%

$26.82

5.6%

0.50

Net PPE/Sales:
Base Case: Same assumption used in the model.
Net PPE / Sales

123.1%

105.6%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

102.2%

101.00%

$33.48

6.0%

110.00%

-0.80

Best Case Scenario: CenturyLink is able to use its net PPE more efficiently to generate sales, which
allows the company to increase sales without incurring the expenses associated with purchasing more
assets.
Net PPE / Sales

123.1%

105.6%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

102.2%

101.00%

$40.46

6.6%

102.23%

-0.80

Worst Case Scenario: CenturyLink is only able achieve a long-term constant growth rate of 1.4% by
purchasing additional assets or acquiring firms at a faster rate than 1.4%. As such, this causes CTLs net
PPE relative to sales to increase to its ten-year historical average of 123.14%, which decreases the
intrinsic value to $21.59.
Net PPE / Sales

123.1%

105.6%

Estimated
price for
11/19/2015
Projected ROIC at
horizon

102.2%

101.00%

$21.59

5.1%

123.14%

-0.80

79 | P a g e

Sensitivity and Scenario Analysis Summary

Sales Growth
COGS/Sales
SGA/Sales
Net PPE/Sales

Price Sensitivity:
1%

Best Case
Scenario

Price

Worst Case
Scenario

Price

1.84
4.22
4.22
1.29

35.95
42.85
35.05
40.46

1.57
8.47
0.67
6.08

28.07
20.94
26.82
21.59

-6.31
-13.44
-7.56
-12.79

Cost of revenue and SGA as a percentage of sales are the most sensitive a one percentage change in the
inputs. A 1% change in the inputs causes an intrinsic price change of $4.22, which shows that accurate
forecasts are implicit to the reliability of the model. This exposes potential issues with the model; the
model is prone to user bias as almost any value is able to be entered to compute any possible price. By
changing the forecasted cost of revenue to its most recent value of 43.4% calculates an intrinsic value of
only $20.94, which is 37.46% lower than the intrinsic value of $33.48 using a forecasted cost of revenue
of 40.16%. By making a small change to the inputs in the model, CenturyLink suddenly appears
overvalued in the market.

80 | P a g e

CenturyLink
COMPANY ANALYSIS AND VALUATION

V. Cash Flow Valuation

Table of Contents
I.

The Company, Industry, and Competitors

II.

Financial Performance Analysis

III.

Cost of Capital, Capital Structure Analysis and Distributions

IV.

Financial Statements Forecasts

V.

Cash Flow Valuation

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 81-82

Free Cash Flow to Firm (FCFF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 83-84
Adjusted Present Value (APV) Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 84-85
Free Cash Flow to Equity Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 85-86
Issues with the Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 86

VI.

Relative (Multiples) Valuation Analysis

VII.

Summary and Conclusions

Executive Summary: Cash Flow Valuation Methods

FCFF Valuation Method
Most recent actual fiscal year end
Target valuation date
Most recent fiscal year-end prior to target date
Number of days from target to fiscal year-end prior to target
Value of operations on target date
Value of investments on target date
Total value of firm on target date
Value of debt, preferred stock, and other non-operating liabilities on target
date
Value of equity on target date
Number of shares on target date

Price per share on target date

12/31/2014
11/19/2015
12/31/2014
323.00
47,117
4,892
52,009
33,163
18,846
563

33.48

Entity Valuation (FCFF) discounts CTLs free cash flows back to present value using CTLs
forecasted WACC of 5.997%.
o Its V-ops of $47,117 is added to value of investments to compute a total firm
value of $52.009 billion on November 19, 2015.
o CTLs high leverage causes a large deduction in the value of equity due to its
$33.16 billion value of debt and other non-op liabilities

APV Method
Most recent actual fiscal year end
Target valuation date
Most recent fiscal year-end prior to target date
Number of days from target to fiscal year-end prior to target
Value of operations on target date
Value of investments on target date
Total value of firm on target date

12/31/2014
11/19/2015
12/31/2014
323.00
47,020
840
47,860

Value of debt, preferred stock, and other non-operating liabilities on target

date
Value of equity on target date
Number of shares on target date

Price per share on target date

29,111
18,749
563

33.30

Similar to entity valuation, APV discounts CTLs free cash flows back to present value,
however, APV uses the unlevered cost of equity of 7.12%.
o Financial leverage is then taken into account through the tax shield.
CTLs tax shield of $8.197 billion is added to the unlevered value of ops to calculate a
total value of operations of $
47.02 billion
o As with FCFF valuation, CTLs high leverage significantly reduces the value of
equity due to its $29.11 billion value of debt and other non-op liabilities
81 | P a g e

Valuation by Method
$34.00
$33.00
$32.00
$31.00
$30.00
$29.00

$33.48

$33.30

FCFF

APV

$28.00
$27.00

$28.43

$26.00
$25.00

Market Value

Valuation Method
Price Per Share
Under/Overvalued (Amount)
Market Value
$28.43
FCFF Intrinsic Value
$33.48
Undervalued by $5.05
APV Intrinsic Value
$33.40
Undervalued by $4.87
FCFE Value
N/A
Overvalued by $28.43
Entity valuation and APV valuation both show that CenturyLink is undervalued in the market.
FCFE valuation computes a negative intrinsic value and therefore shows CTL as overvalued in
the market.
Best Cash Flow Valuation Method for CTL
The strongest cash flow measure for CenturyLink is entity valuation because the company is
close to its target capital structure, so WACC is an appropriate discount rate to discount CTLs
cash flows at. However, APV is also a good measure of CTLs intrinsic value due to the
companys high financial leverage. Value of unlevered operations is significantly lower than the
value of leveraged ops, but CTLs large tax shield is an important driver of value in APV. Since
CTL is close to its target capital structure, APV computes a value of $33.30, only $.18 less than
the value derived from entity valuation. FCFE valuation yields a negative valuation due to CTLs
high leverage; this drives up the companys cost of equity to 9.87%. Discounting CTLs cash
flows with cost of equity shows a negative valuation because it is too high of a discount rate.

82 | P a g e

Free Cash Flow to Firm (FCFF) Valuation

A companys free cash flow to firm is calculated as net operating profit after tax (NOPAT) minus
investment in operating capital. In FCFF valuation, also known as entity valuation, these free
cash flows are then discounted back to present values at the firms WACC. Once the company
reaches constant growth, terminal value is determined by FCF x (1+g) / (WACC long-term
growth); terminal value is then discounted back to present value at the WACC. Adding the
terminal value and horizon value provides the value of the operations at the target date. Value
of investments is then added to the value of operations to get total firm value. Next, the value
of debt, preferred stock, and other non-op liabilities are subtracted from total firm value to
calculate the value of equity. In the last step of FCFF valuation, the value of equity is divided by
total shares outstanding to compute the intrinsic value per share of stock.

Price per share on target date

Most recent actual fiscal year end
Target valuation date
Most recent fiscal year-end prior to target
date
Number of days from target to fiscal year-end
prior to target
Value of operations on target date
Value of investments on target date
Total value of firm on target date
Value of debt, preferred stock, and other
non-operating liabilities on target date
Value of equity on target date
Number of shares on target date
Price per share, target date

12/31/2014
11/19/2015
12/31/2014
323.00
47,117
4,892
52,009
33,163
18,846
563

33.48

FCFF valuation discounts CTLs cash flows at its weighted average cost of capital of 5.99%, and
computes a value of operations of $47.117 billion. CTLs $4.89 billion in investments is added to
the value of ops to get a total firm value of $52.009 billion. Value of debt and other non-op
liabilities of $33.16 billion are subtracted from the value of the firm, which computes a value of
equity of $18.846 billion. Value of equity is divided by 562.99 million shares of common stock
for an intrinsic value of $33.48 per share on the target date of November 19, 2015. As of close
on November 11, 2015 CTLs market value is $28.43 per share, which shows that CTL is
currently undervalued in the market.
FCFF Intrinsic Value (11/19/15)
Market Value (11/11/15)
Difference (IV MV)

$33.48
$28.43
$5.05

Undervalued by $5.05

83 | P a g e

CenturyLinks intrinsic value of $33.48 per share of stock and market value of $28.43 shows that
CTL is undervalued by $5.05 in the market, or 17.76%. Assuming the companys MV converges
to its intrinsic value, the expected capital gains yield is 17.76%.

Drivers of Value:
CenturyLinks main driver of value is its value of operations of $47.17 billion due to its FCFs of
$2.05 billion when the company reaches a long-term growth rate of 1.4% in 2021. CTLs value of
investments is also a strong driver of value, as investments represent 9.4% of total firm value.
However, CTLs high financial leverage leads to a $33.16 billion value of debt and other non-op
liabilities, which leads to a significant reduction in value.
Entity valuation is a strong measure of CTLs intrinsic value due to its high financial leverage,
which brings its WACC to only 5.99%. CTL is nearing its target capital structure so its current
WACC is an accurate measure of the companys expected long-term weighted average cost of
capital. WACC is an appropriate discount rate for CTL because of its high leverage; using cost of
equity as a discount rate causes CTL to appear overvalued due to the higher risk of its equity.

Adjusted Present Value (APV) Valuation

Adjusted present value is a similar valuation measure to entity valuation, however, APV
accounts for changes in capital structure. As with FCFF valuation, APV discounts the companys
free cash flows to present value; APV uses unlevered cost of equity as the discount rate rather
than WACC, which is used in entity valuation. APV then accounts for financial leverage by
adding the present value of the tax shield to unlevered value of operations to get total value of
ops. Once the value of ops is calculated, APV determines intrinsic value just as entity valuation;
investments are added to value of ops, then value of debt and other non-op liabilities are
subtracted. This yields the value of equity, which is divided by shares outstanding to calculate
the intrinsic value per share.

Price per share on target date

APV
12/31/2014
11/19/2015
12/31/2014

Most recent actual fiscal year end

Target valuation date
Most recent fiscal year-end prior to target date
Number of days from target to fiscal year-end
prior to target
Value of operations on target date
Value of investments on target date
Total value of firm on target date
Value of debt, preferred stock, and other
nonoperating liabilities on target date
Value of equity on target date
Number of shares on target date
Price per share, target date

323.00
47,020
840
47,860
29,111
18,749
563

33.30

84 | P a g e

CTLs unlevered value of operations at the end of fiscal year 2014 is $38.154 billion based on an
unlevered cost of equity of 7.12% and its tax shield value of $8.197 billion is added to unlevered
value of the ops. Adjusted for half-year conversion, this calculates a value of operations of
$47.02 billion on November 19, 2015. Total firm value minus debt and other non-op liabilities
computes a value of equity of $18.749 billion. Divided by the companys 562.99 million shares
outstanding yields an intrinsic value per share of $33.30, only $.18 less than entity valuation. As
such, CTLs APV intrinsic value shows that the company is undervalued in the market by $4.87
as based on a closing price of $28.43 as of 11/11/15.
APV Intrinsic Value (11/19/15)
Market Value (11/11/15)
Difference (IV MV)

$33.30
$28.43
$4.87

Undervalued by $4.87
CTLs APV valuation of $33.30 represents an undervaluation in the market by $4.87; this shows
that CenturyLink is undervalued by 17.13% of market value.

Drivers of Value:
Due to CTLs high leverage, the companys tax shield is projected to be $8.245 billion as of the
end of fiscal year 2015. This large tax shield is an important driver in CTLs APV valuation of
$33.30 as its tax shield represents 17.37% of total firm value.
Adjusted present value is also a strong measure of CTLs intrinsic value since the company is
highly levered and close to its target capital structure of 60% debt and 40% equity. CTL is
currently financed with 40.8% equity, which shows that CTLs cost of capital is expected to
remain relatively constant. APV valuation computes an intrinsic value only $.18 lower than
entity valuation due to its similar discount rate used when the tax shield is added into APV.

Free Cash Flow to Equity (FCFE) Valuation

CTLs free cash flow to equity valuation computes a negative intrinsic value for CTL because the
company is highly levered. Its horizon ROIC is 5.99%, equal to the companys WACC of 5.99%,
and cost of equity is 9.87%. Discounting CenturyLinks FCFE by the cost of equity yields a
negative valuation because cost of equity is significantly higher than the companys long-term
return on invested capital. Furthermore, CTLs long-term FCFE is lower than its FCFF because
the company is nearing its target capital structure and net borrowing is expected to slow down
quickly once CTL reaches its target capital structure.

85 | P a g e

Drivers of Value:
Due to CTLs negative FCFE valuation, there are no drivers of positive value, but rather strong
drivers that lead to a reduction in value. CenturyLinks cost of equity of 9.87% causes the
largest reduction in value because its ROIC is 5.99% and long-term growth is only 1.4%. The
companys cost of equity causes the value of debt and other non-op liabilities to exceed total
firm value, which computes a valuation of $(1.12) on the target date.

Issues with the Model

The financial model used for cash flow valuation is subject to user bias, and allows the user to
compute almost any intrinsic value. Since the model uses a significant amount of inputs, it
enables the user of the spreadsheet to change a combination of values that cause large changes
to the intrinsic value. For example, using different inputs for CenturyLink allowed for a
calculated range of intrinsic values anywhere from negative $20 to as high as $80.

86 | P a g e

CenturyLink
COMPANY ANALYSIS AND VALUATION

VI. Relative (Multiples) Valuation

Analysis

Table of Contents
I.

The Company, Industry, and Competitors

II.

Financial Performance Analysis

III.

Cost of Capital, Capital Structure Analysis and Distributions

IV.

Financial Statements Forecasts

V.

Cash Flow Valuation

VI.

Relative (Multiples) Valuation Analysis

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 87

Valuation Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 88
Comparable Companies List. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 89-98
Multiples Valuation Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 99

VII.

Summary and Conclusions

Executive Summary: Relative Multiples Valuation Analysis

Comparable Multiples Summary
Valuation Ratio

CTL

Average

LVLT

WSTC

CNSL

FTR

TU

CCOI

ATNI

VG

ZAYO

JCOM

P/E

20.83

27.12

31.43

9.84

31.29

32.46

17.47

27.37

43.29

30.08

P/S

0.86

2.58

1.91

0.77

1.37

1.02

2.16

3.41

3.59

1.42

4.35

5.20

P/B

1.05

9.02

2.46

3.80

1.02

3.48

60.26

1.93

3.42

4.99

4.06

P/FCF

6.83

26.25

38.40

6.82

13.51

11.92

24.40

65.25

7.83

13.65

79.91

20.24

P/CF

2.97

8.97

10.07

4.83

5.05

4.28

7.33

18.28

5.65

11.78

9.72

18.67

Summary Statistics and Valuation Benchmarks

Valuation Ratio

Average
27.12
2.58
9.02
26.25
8.97

P/E
P/S
P/B
P/FCF
P/CF

Standard Deviation
9.22
1.56
16.49
23.76
5.18

Median
28.73
2.16
3.64
16.94
8.15

S&P 500
17.95
2.72
11.04

Industry
60.73
1.35
6.15
19.57
6.77

1.78

CenturyLink's Value Using Multiples

Estimated Value using

P/E

P/S

P/B

P/FCF

P/CF

Avg. Price

Average
Sample Median
Industry
S&P 500

36.72

84.65

242.36

108.42

85.20

38.90

70.77

97.71

69.98

77.42

62.75
24.14

14.67
58.05

19.11
72.60

20.89
-

21.16
104.21

111.47
70.95
27.72
64.75

The best price multiple to estimate CenturyLinks value is the P/E multiple because:
o It is the only price multiple among the comparable companies that is not
overvalued on average with respect to the industry and the S&P 500
This means CenturyLinks estimated value using P/E is less likely to be
overvalued
Using the t-statistic with ten degrees of freedom, the 95% confidence price range for
CenturyLink is given by:

= (31.68 41.75)

87 | P a g e

Valuation Methodology:
The following steps were taken in order to conduct multiples analysis for CenturyLink:
1. Create a group of comparable companies
From the Russell 3000 Wired Telecommunication Subsector Index (RGUST14)
companies with a market capitalization of $1B - $20B are chosen to ensure that
the firms are of the same size and maturity as CenturyLink.
2. Add any additional companies with guidance from senior banker
Bloomberg Intelligence (BI) is used as a proxy for a senior banker's experience,
where BI Peers of CenturyLink with market capitalizations of $1B - $20B are
included in the list of comparable companies
3. Brief analysis of each company
This includes key statistics, recent price performance, company profile, and a
brief description of each firm to understand how they compare to CenturyLink
4. Determine the relevant price multiples to use in the analysis and compile data
The following price multiples were used in this analysis:
i. P/E
ii. P/S
iii. P/B
iv. P/FCF
v. P/CF

Comparable Companies Short List:

1. Atlantic Tele-Network Inc. (ATNI)
2. Cogent Communications Holdings Inc. (CCOI)
3. Consolidated Communications Holdings, Inc. (CNSL)
4. Frontier Communications Corp. (FTR)
5. J2 Global Inc. (JCOM)
6. Level 3 Communications Inc. (LVLT)
7. TELUS Corporation (TU)
8. Vonage Holdings Corp. (VG)
9. West Corporation (WSTC)
10. ZAYO Group Holdings Inc. (ZAYO)

88 | P a g e

Comparable Companies Expanded List:

Atlantic Telecommunications Network

Source: Morningstar
Key Statistics (TTM):
Market Cap $1.2B
Shares Outs. 16.06M
Revenue $361M
Net income $25M
EPS 1.58
Dividend Yield 1.53%
Beta 0.84

Net Five Year Growth:

Revenue Growth 6.83%
Op. Margin 4.19%
PM Growth 6.26%
EPS Growth 5.35%

Company Profile:
CEO/President: Michael T. Prior
CFO/Treasurer: Justin D. Benincasa
Stock Type Slow Growth/Small Growth
Employees 1,000
Primary Products Wireless and
Broadband Internet

Brief Description: ATNI provides telecommunications services to rural, niche, and other underserved markets and geographies. It provides both wireless and wireline connectivity to
residential and business customers, as well as providing a range of wireless solutions, local
exchange services, and broadband internet services.
ATNI Price Multiples
P/E
P/S
P/B
P/FCF
27.37
3.59
1.93
7.83

P/CF
5.65
89 | P a g e

Cogent Communications Holdings Inc.

Source: Morningstar
Key Statistics (TTM):
Market Cap $1.5B
Shares Outs.
Revenue $400M
Net income $2.1M
EPS 0.05
Dividend Yield 4.08%
Beta 0.66

Net Five Year Growth:

Revenue Growth 10.01%
Op. Margin 13.87%
PM Growth 16.18%
EPS Growth 15.45%

Company Profile:
CEO/Chairman/President: David Schaeffer
CFO/Treasurer: Thaddeus G. Weed
Stock Type High Yield
Employees - 772
Primary Products Fiber Optic Broadband

Brief Description: CCOI is an optical Internet service provider that delivers ultra-high speed
internet access and transport services. It serves businesses in the multi-tenant marketplace
and service providers located in major metropolitan areas across the United States.

P/E
-

CCOI Price Multiples

P/S
P/B
P/FCF
P/CF
3.41
60.26
65.25
18.28

90 | P a g e

Consolidated Communications Holdings, Inc.

Source: Morningstar
Key Statistics (TTM):
Market Cap $1B
Shares Outs.
Revenue $800M
Net income (16.3M)
EPS (0.33)
Dividend Yield 7.44%
Beta 0.95

Net Five Year Growth:

Revenue Growth 9.37%
Op. Margin 5.22%
PM Growth (9.56%)
EPS Growth (16.06%)

Company Profile:
CEO/Director: C. Robert Udell
CFO/Senior Vice Pres.: Steven L. Childers
Stock Type High Yield
Employees 1,960
Primary Products Wired/wireless
Internet Access and Voice Services

Brief Description: CNSL provides local and long distance telephone, digital telephone, highspeed Internet access, and digital television services to individuals and businesses in California,
Illinois, Iowa, Kansas, Minnesota, Missouri, North/South Dakota, Pennsylvania, Texas, and
Wisconsin.
CNSL Price Multiples
P/E
P/S
P/B
P/FCF
31.29
1.37
3.80
13.51

P/CF
5.05

91 | P a g e

Frontier Communications Corp.

Source: Morningstar
Key Statistics (TTM):
Market Cap %5.5B
Shares Outs. 1,168.21M
Revenue $5.5B
Net income ($79.1M)
EPS (0.14)
Dividend Yield 8.72%
Beta 0.72

Net Five Year Growth:

Revenue Growth 17.64%
Op. Margin 6.23%
PM Growth 1.93%
EPS Growth (19.31%)

Company Profile:
CEO/Director: Danial McCarthy
CFO/Exec. Vice Pres.: Cecilia K. McKenney
Stock Type Distressed
Employees 18,600
Primary Products Wired/Wireless
Internet Connection and Voice Services

Brief Description: FTR provides communications services to residential and business customers
in rural areas, and small to medium-sized towns and cities in the United States. It offers a
variety of voice, data, Internet, and television services and products.

P/E
32.46

FTR Price Multiples

P/S
P/B
P/FCF
1.02
1.02
11.92

P/CF
4.28

92 | P a g e

J2 Global Inc.

Source: Morningstar
Key Statistics (TTM):
Market Cap $3.8B
Shares Outs. 48.52M
Revenue $700M
Net income $100M
EPS 2.67
Dividend Yield 1.54%
Beta 1.20

Net Five Year Growth:

Revenue Growth 19.52%
Op. Margin 12.26%
PM Growth 13.40%
EPS Growth 11.76%

Company Profile:
CEO: Nehemia Zucker
CFO/President: R. Scott Turicchi
Stock Type Slow Growth
Employees 1,410
Primary Products Voice and Cloud
Services

Brief Description: JCOM provides cloud-based communications and storage message services,
as well as online fax, virtual voice, hosted email, email marketing, online backup, and unified
communications services.
JCOM Price Multiples
P/E
P/S
P/B
P/FCF
P/CF
30.08
5.20
4.06
20.24
18.67

93 | P a g e

Level 3 Communications Inc.

Source: Morningstar
Key Statistics (TTM):
Market Cap $18.1B
Shares Outs. 356.27M
Revenue $8.1B
Net income $200M
EPS 0.51
Dividend Yield N/A
Beta 1.43

Net Five Year Growth:

Revenue Growth 12.49%
Op. Margin Missing Data
PM Growth Missing Data
EPS Growth N/A

Company Profile:
CEO/Director/Pres.: Jeffrey K. Storey
CFO/Exec. Vice Pres.: Sunit S. Patel
Stock Type Speculative Growth
Employees 13,500
Primary Products

Brief Description: Level 3 Communications Inc. is a facilities based provider of a broad

range of integrated communications services.

P/E
31.43

LVLT Price Multiples

P/S
P/B
P/FCF
P/CF
1.91
2.46
38.40
10.07

94 | P a g e

TELUS Corp.

Source: Morningstar
Key Statistics (TTM):
Market Cap $18.6B
Shares Outs. 600.09M
Revenue $9.2B
Net income $1.1B
EPS 1.78
Dividend Yield 4.24%
Beta 0.94

Net Five Year Growth:

Revenue Growth 4.42%
Op. Margin 6.13%
PM Growth 7.38%
EPS Growth 8.03%

Company Profile:
CEO/Director/Pres.: Joseph M. Natale
CFO/ Exec. Vice Pres.: John R. Gossling
Stock Type Unclassified
Employees 43,670
Primary Products Wired/wireless
Internet Access and Voice Services

Brief Description: TU is a telecommunications company providing a variety of communications

products and services which include voice, data, Internet, and wireless services to businesses
and consumers in Canada.

P/E
17.47

TU Price Multiples
P/S
P/B
P/FCF
2.16
3.48
24.40

P/CF
7.33

95 | P a g e

Vonage Holdings Corp.

Source: Morningstar
Key Statistics (TTM):
Market Cap $1.4B
Shares Outs. 213.56M
Revenue $900M
Net income $24.9
EPS 0.11
Dividend Yield N/A
Beta 0.23

Net Five Year Growth:

Revenue Growth (0.46%)
Op. Margin (3.52%)
PM Growth Missing Data
EPS Growth Missing Data

Company Profile:
CEO/Director: Alan Masarek
CFO/Treasurer: David T. Pearson
Stock Type Slow Growth
Employees 1,400
Primary Products VoIP Services for Preexisting Internet Connections

Brief Description: VG offers technology that uses customers existing high-speed Internet
connection (VoIP) to make and receive phone calls worldwide with a touch-tone telephone.
*Note: This firm is included in comparable companies as direct competitor to wired/wireless
telecommunications given that VoIP is an unregulated and more affordable alternative.

P/E
43.29

VG Price Multiples
P/S
P/B
P/FCF
1.42
3.42
13.65

P/CF
11.78

96 | P a g e

West Corporation

Source: Morningstar
Key Statistics (TTM):
Market Cap $2.1B
Shares Outs. 83.22M
Revenue $2.3B
Net income $200M
EPS 2.26
Dividend Yield 3.52%
Beta 0.80

Net Five Year Growth:

Revenue Growth (1.36%)
Op. Margin 2.87%
PM Growth 12.42%
EPS Growth Missing Data

Company Profile:
CEO/Chairman: Thomas B. Barker
CFO/Treasurer: Jan D. Madsen
Stock Type Slow Growth
Employees 9,700
Primary Products Video and Voice
Services

Brief Description: WSTC primarily offers communications services and infrastructures systems
such as conferencing services, including on-demand automated conferencing, operator assisted
services, internet conferencing services, and video conferencing services. West conducts
business operations worldwide.

P/E
9.84

WSTC Price Multiples

P/S
P/B
P/FCF
0.77
6.82

P/CF
4.83

97 | P a g e

ZAYO Group Holdings Inc.

Source: Morningstar
Key Statistics (TTM):
Market Cap $5.9B
Shares Outs. 244.87M
Revenue $1.4B
Net income (60M)
EPS (0.25)
Dividend Yield N/A
Beta 0.00

Net Five Year Growth:

Revenue Growth Missing
Op. Margin Missing data
PM Growth Missing data
EPS Growth Missing data

Company Profile:
CEO/Chairman: Daniel P. Caruso
CFO/Vice Pres.: Ken Desgarennes
Stock Type Cyclical
Employees 1,897
Primary Products Fiber Optic, Broadband,
and Colocation

Brief Description: ZAYO is a global provider of bandwidth infrastructure services, including dark
fiber, wavelengths, SONET, Ethernet, IP services, and carrier-neutral colocation and
interconnection.

P/E
-

ZAYO Price Multiples

P/S
P/B
P/FCF
4.35
4.99
79.91

P/CF
9.72

98 | P a g e

Comparable Multiples Summary

Valuation Ratio

CTL

Average

LVLT

WSTC

CNSL

FTR

TU

CCOI

ATNI

VG

ZAYO

JCOM

P/E

20.83

27.12

31.43

9.84

31.29

32.46

17.47

27.37

43.29

30.08

P/S

0.86

2.58

1.91

0.77

1.37

1.02

2.16

3.41

3.59

1.42

4.35

5.20

P/B

1.05

9.02

2.46

3.80

1.02

3.48

60.26

1.93

3.42

4.99

4.06

P/FCF

6.83

26.25

38.40

6.82

13.51

11.92

24.40

65.25

7.83

13.65

79.91

20.24

P/CF

2.97

8.97

10.07

4.83

5.05

4.28

7.33

18.28

5.65

11.78

9.72

18.67

Summary Statistics and Valuation Benchmarks

Valuation Ratio

P/E
P/S
P/B
P/FCF
P/CF

Average
27.12
2.58
9.02
26.25
8.97

Standard Deviation
9.22
1.56
16.49
23.76
5.18

Median
28.73
2.16
3.64
16.94
8.15

S&P 500
17.95
2.72
11.04

Industry
60.73
1.35
6.15
19.57
6.77

1.78

CenturyLink's Value Using Multiples

Estimated Value using

P/E

P/S

P/B

P/FCF

P/CF

Avg. Price

Average
Sample Median
Industry
S&P 500

36.72

84.65

242.36

108.42

85.20

38.90

70.77

97.71

69.98

77.42

62.75
24.14

14.67
58.05

19.11
72.60

20.89
-

21.16
104.21

111.47
70.95
27.72
64.75

The tables above indicate that the best multiple to estimate CenturyLinks value is the P/E
multiple because It is the only price multiple that is not overvalued on average with respect to
the industry and the S&P 500. This means that it is less likely that the computed price using
average P/E in the sample is overvalued with respect to its industry and the market.
Hence, using the t-statistic with ten degrees of freedom the 95% confidence price range for
CenturyLink is given by:

= (36.72

) = (31.68 41.75)

99 | P a g e

CenturyLink
COMPANY ANALYSIS AND VALUATION

VII. Summary and Conclusions

Table of Contents
I.

The Company, Industry, and Competitors

II.

Financial Performance Analysis

III.

Cost of Capital, Capital Structure Analysis and Distributions

IV.

Financial Statements Forecasts

V.

Cash Flow Valuation

VI.

Relative (Multiples) Valuation Analysis

VII.

Summary and Conclusions

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 100-101

Mergers and Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 102
Drivers of WACC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 102-103
Assumptions Used In Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 103
Cash Flow Valuation Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 103-105
DuPont and Altman Z-Score Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 106-108
Relative Valuation Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 108

Executive Summary: Summary and Conclusions

Mergers and
Acquisitions

Drivers of WACC

Assumptions Used in
Model

CenturyLinks recent acquisitions of DataGardens, Cognilytics, and

Orchestrate affect CTLs long-term growth rate as the company
enters new markets including cloud computing & services, big
data, and predictive data analytics.
CTLs forecasted WACC of 5.997% is an important factor in cash
flow valuation. The main drivers of CTLs WACC are its target
capital structure of 60% debt and 40% equity, its cost of equity of
9.87%, after-tax cost of long-term debt of 3.45%, and after-tax
cost of short-term debt of 2.4%.
A few important drivers of cash flow valuation for CenturyLink are
long-term revenue growth rate, COGS/Sales, and SGA/Sales.
Constant revenue growth is projected to be 1.4%, COGS/Sales is
forecasted to decline to 40.16% from its current rate of 43.4%, and
SGA/Sales is expected to decline to 17.0% as CTL wraps up its
employee-retraining program.

Valuation by Method
$34.00
$33.00
$32.00
$31.00
$30.00
$29.00

$33.48

$33.30

FCFF

APV

$28.00

$27.00

$28.43

$26.00
$25.00

Market Value

Entity valuation and APV

both show CTL as undervalued
in the market.
FCFE returned a negative
valuation (overvalued) due to
CTLs cost of equity of 9.87%.
Entity valuation is the
strongest valuation method for
CTL, as its WACC of 5.997% is an
appropriate discount rate.
o APV shows a similar
valuation to FCFF since CTL is
nearing its target capital
structure

Valuation Method
Price Per Share
Under/Overvalued (Amount)
Market Value
$28.43
FCFF Intrinsic Value
$33.48
Undervalued by $5.05
APV Intrinsic Value
$33.40
Undervalued by $4.87
FCFE Value
N/A
Overvalued by $28.43
Entity valuation shows that CTL is undervalued in the market by $5.05, while APV
calculates the company as undervalued by $4.87.
100 | P a g e

Multiples Valuation Analysis

CenturyLink's Value Using Multiples
Estimated Value using

P/E

P/S

P/B

P/FCF

P/CF

Avg. Price

Average
Median Sample
Industry
S&P 500

36.72

84.65

242.36

108.42

85.20

38.90

70.77

97.71

69.98

77.42

62.75
24.14

14.67
58.05

19.11
72.60

20.89
-

21.16
104.21

111.47
70.95
27.72
64.75

The best estimate for CenturyLinks price range is calculated using the P/E ratio which shows the
lowest standard deviation. Hence, CenturyLinks price range is $31.78 $41.75 using the t
statistic.
o Similar to cash flow valuation, relative valuation shows that CTL is undervalued in the
market.

Multiples forecast CTL is undervalued in the market by a range between $3.35

and $13.32.

Conclusion:
Both cash flow and relative valuation methods show that CTLs intrinsic value is higher than the
market price of $28.43. Therefore, by all valuation measures excluding FCFE, CenturyLink is
undervalued in the market.

FCFE yields a negative valuation for CenturyLink due to the companys high financial
leverage; using its cost of equity of 9.87% causes the present value of cash flows to
appear lower than CTLs value of debt and other non-op liabilities.

However, despite the valuation methods projecting that CenturyLink is undervalued by a range
between 11.78% and 46.85% of market value, analysts remain skeptical about CTLs future
growth potential.

Wall Street Analyst Opinions

Buys
6

Buy/Holds
2

Holds
8

Hold/Sells
1

Sells
0

Source: S&P Capital IQ

58.82% of 17 analysts currently recommend a hold strategy while 35.3% recommend a buy strategy.
Assuming CTL is able to achieve its expected constant growth rate of 1.4%, CTL appears as a strong buy
especially considering the companys dividend policy. However, CenturyLink remains a risky stock
purchase due to its high financial leverage and inability to reign in its cost of revenue and SGA expenses
since its merger with Qwest.
101 | P a g e

Mergers & Acquisitions

DataGardens
CenturyLinks acquisition of DataGarden marks a move to further CTLs interest in cloud
computing and storage. DataGardens primary service is as a backup servers and information to
aid in a clients recovery during disasters. This merger allows CTL to provide its business clients
with more reliable servers that utilize data insurance from disasters on the IT side of
operations. This merger is relatively small to the whole. According to Forbes Magazines Ben
Kepes, Interestingly it looks like DataGardens hasnt picked up any significant funding with
that context, this deal looks like a good one for the founders. Others suggested that this deal
was made for future developments that result from the disaster recovery services that
DataGarden offers. Ben Kepes remains skeptical about the future pay offs of this gamble CTL
made. This merger is viewed as an base expansion of operations and assumed to not yield
results very much different from CTLs ROIC because this acquisition is part of CTLs broader
plan of expanding into Cloud technology.

Cognilytics
CenturyLinks acquisition of Cognilytics helps CTL provide Big Data analytics for mid and large
sized companies. Cognilytics specializes in predictive analytics by using large data sets to make
educated assumptions. There exists little information from credible news sources about this
acquisition. Much like DataGarden this acquisition is CTLs continued intention of breaking into
new technology and looking toward cloud solutions.

Orchestrate
In 2015 CenturyLink made only one new acquisition and like its other previous acquisitions
Orchestrate is another small company focused on Data base services. Most of the literature
about this merger is either embellishments from management or highly technical articles
geared for engineers. In other words, credible business sources are not making comments on
this merger. CTLs acquisition strategy is more of a research and development arm of future
operations. Its strategy is to just buy already proven technologies that it can incorporate into
service packages to gain a competitive edge.

Drivers of WACC
The primary drivers of CTLs WACC are its bond rating and market risk premium. The bond
rating carries the most weight because CTL carries debt to equity ratio of 2 to 1 and any change
in its bond spread results in a large change in its WACC. The market risk premium drives prices
and expectations among different investors. However, the market risk premium is highly
dependent on time period, industry, variance with the whole market, variance with commonly
102 | P a g e

compared indices, changes in government bond yields, and investor expectations of each of
these variables. This is a weakness of the capital asset pricing model and introduces a larger
variance between analyst opinions. Ultimately, professional judgement became key in
evaluating how the multitude of these variables adjusted CTLs WACC.

Assumptions Used in Model

Constant Growth Rate:
CenturyLinks expected long-term constant growth rate of 1.4% is an important factor in cash
flow valuation. The companys long-term growth rate of 1.4% determines the free cash flows
available, and greatly affects the value of operations.

COGS/Sales:
Cost of goods sold, as a percent of sales is also an important driver in the valuation of
CenturyLink. The companys merger with Qwest in 2011 caused COGS/Sales to increase from its
ten year average of 37.7% to its most recent of 43.4%. Using the historical average of 37.7%
yields an intrinsic value of $42.87, whereas, the most recent 43.4% shows an intrinsic value of
only $20.96, all else constant. As CTL reaches positive sales growth in 2019 it is projected that
the companys COGS is expected to trend down to 40.16%.

SGA/Sales:
Selling, general, and admin, as a percent of sales also significantly affects the valuation of
CenturyLink. CTLs ten year historical average of 16.6% leads to an intrinsic value of $35.00.
However, the companys historical average is not an accurate representation due to its merger
with Qwest. CenturyLinks most recent SGA/Sales of 18.4% is expected to decline to 17.0% as
CTL finishes its employee-retraining program.

Cash Flow Valuation Methods

Summary of Valuation Methods:
Market Value
$28.43

Entity Valuation
$33.48

APV
$33.30

FCFE
N/A

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Entity Valuation (FCFF):

Entity valuation is the most accurate measure of intrinsic value for CenturyLink with an
expected intrinsic value of $33.48 on the target date of November 19, 2015. Entity valuation is
a strong measure of CTLs value because the company is highly levered; WACC is the best
representation of CTLs discount rate. CenturyLinks strong cash flows and growth rate of 1.4%
lead to a value of operations of $47.117 billion, which is the largest driver of value. However,
the companys debt and other non-op liabilities value of $33.16 billion significantly reduce
value.
Price per share on target date

FCFF

Most recent actual fiscal year end

12/31/2014

Target valuation date

11/19/2015

Most recent fiscal year-end prior to

target date

12/31/2014

Number of days from target to fiscal

year-end prior to target

323.00

Value of operations on target date

47,117

Value of investments on target date

4,892

Total value of firm on target date

52,009

Value of debt, preferred stock, and

other nonoperating liabilities on target
date

33,163

Value of equity on target date

18,846

Number of shares on target date

Price per share, target date

563
$

33.48

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Adjusted Present Value (APV):

APV is also an accurate measure of CTLs intrinsic value, with a computed value of $33.30 on
11/19/15. CTL is close to its target capital structure of 60% debt (currently financed with 59.2%
debt), so the intrinsic value calculated by APV is only $.18 less than entity valuation. Since
CenturyLink is highly levered, the present value of the companys tax shield is an important
driver of value as the tax shield accounts for 17.37% of total firm value. Its unlevered cost of
equity of 7.12% and large tax shield leads to value of the ops of $47.02 billion. As with FCFF
valuation, the value of debt causes a large reduction in the value of equity.
Price per share on target date

APV

Most recent actual fiscal year end

12/31/2014

Target valuation date

11/19/2015

Most recent fiscal year-end prior to target

date

12/31/2014

Number of days from target to fiscal yearend prior to target

323.00

Value of operations on target date

47,020

Value of investments on target date

840

Total value of firm on target date

47,860

Value of debt, preferred stock, and other

nonoperating liabilities on target date

29,111

Value of equity on target date

18,749

Number of shares on target date

Price per share, target date

563
$

33.30

Free Cash Flow to Equity (FCFE):

FCFE is the worst measure of value for CTL as it shows a negative valuation of $(1.12) on the
target date. CTLs high leverage leads to a high cost of equity; discounting the companys free
cash flow to equity by its cost of equity causes the total firm value to be less than the value of
debt and other non-op liabilities. Since total firm value is less than the value of debt, CTLs FCFE
shows a negative valuation.

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-5.00%

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035

-2.00%

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035

Complete DuPont Analysis

Key Driver of Return on Equity

18.00%

16.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

-4.00%
Profit Margin

Profit Margin
ROE

Accounting Income vs Free Cash Flow

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

FCF

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Historical and Projected Equity Multiplier

4.00
3.80
3.60
3.40
3.20
3.00
2.80

2.60
2.40
2.20

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035

2.00

Key Takeaways:

CenturyLinks FCF/profit margin is projected to reach a steady state of 3.38% in 2026 as the
result of its transition from higher margin legacy services to wireless and data hosting services
o

Return on Equity continues to decline at an average annual rate of (0.09)% following

2026 in spite of steady state profitability

CenturyLinks leverage decreases at an average annual rate of (1.31)% from 2017 onward
o

This is because all future firm acquisitions of involve small cap IT companies which
require no additional debt to acquire

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Complete Altman Z-Score Analysis

Altman Z-Score Trend:
2005 - 2035
3
2.5
2
1.5
1
0.5

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035

Z-Score

Financial Distress Threshold

Key Takeaways:

CenturyLink continues to face the threat of bankruptcy despite revenue growth stability and
consistent profitability.

This is unlikely to change given that the annual improvement in Z-score begins to decline in
2028, decreasing from an annual growth rate of 2.26% to 1.99%.
o

This means that long-term steady state Z-score falls below the 1.8 threshold for financial
distress

Price Multiple Analysis

CenturyLink's Value Using Multiples
Estimated Value using

P/E

P/S

P/B

P/FCF

P/CF

Avg. Price

Average
Median Sample
Industry
S&P 500

36.72

84.65

242.36

108.42

85.20

38.90

70.77

97.71

69.98

77.42

62.75
24.14

14.67
58.05

19.11
72.60

20.89
-

21.16
104.21

111.47
70.95
27.72
64.75

The best estimate for CenturyLinks price range is calculated using the P/E ratio which shows the lowest
standard deviation. Hence, CenturyLinks price range is $31.78 $41.75 using the t statistic.

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