CenturyLink, Frontier and Windstream have continued to see pressure over the past three quarters as shares at each of these companies dropped dramatically due to issues at each company.
The results and third-quarter outlook were highlighted in a recent Cowen research note.
“Shares in the wireline ILEC/RLEC space (CenturyLink, Frontier, Windstream) have endured the worst three consecutive quarters in industry history, with shares plummeting an average of -20% in 4Q16, -21% in 1Q17, and -24% in 2Q17 (we note another -5% in 3Q17 thus far), mostly from Frontier and Windstream as CenturyLink shares are being supported by the Level 3 acquisition,” Cowen said in a research note.
The financial firm attributes the share declines at these three service providers to various factors.
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Overall, the three companies face the industry-wide challenge of balancing strategic service growth with ongoing legacy service declines and losing market share to cable operators.
Additionally, each of these companies has been dealing with specific headwinds in their businesses. Frontier has been challenged by integrating the properties it purchased from Verizon in California, Texas and Florida, while CenturyLink is dealing with a raft of lawsuits over alleged consumer fraud issues and Windstream is seeing declines in its legacy TDM-based wholesale business sector.
“The flashpoint of the quarter came with Frontier’s dividend cut that escalated investor concerns as management essentially endorsed uncertainty around fundamentals and created a ripple effect through the entire industry that faces some similar cash/dividend/debt concerns,” Cowen and Company said in a research note. “The thematic focus will again be around 1) said fundamental erosion, 2) the respective dividend policies, and 3) M&A progress for each (CTL/LVLT, FTR/VZ-CFT, WIN/ELNK-BVWN, CNSL/FRP).”
Cowen said near-term expectations for CenturyLink and Frontier are “bearish,” adding that it believes “potential downward guidance revisions for both” service providers.
At CenturyLink, the stock decline reflects the bearish outlook, but the telco could get a slight boost from solid third-quarter results from Level 3, which it is in the process of acquiring.
After naming current Level 3 CEO Jeff Storey as the combined company’s leader, a number of issues including lower than expected third-quarter results and a pile of fraud lawsuits will pose various challenges for CenturyLink.
“Despite the management change (appointing Jeff Storey as CEO) which we view as constructive, it is tough recommending the stock ahead of weak results, a possible guidance cut, fraud lawsuit uncertainties, and finding a stand-alone CenturyLink bottom in which Mr. Storey will need to manage from as a starting point for our valuation,” Cowen said.
While Frontier’s recent completion of $1.15 billion refinancing effort will help, the company still faces an uphill battle, particularly on the churn side.
A key focus for Frontier will be reducing CTF churn, which was greater than 3% in the first quarter.
“For Frontier, in similar vein we believe the meaningful share pullback mostly reflects weak results and a potential guidance cut,” Cowen said. “The $1.5B debt refi helps clear out NT debt and chip away at the 2020/2021 debt towers, however may not be enough to put the continued dividend cut story to rest, as much will depend on timing of EBITDA stabilization.”
Finally, Windstream is a different story. Although the service provider faces similar revenue headwinds seen at CenturyLink and Frontier, Cowen said it is the only one out of the trio that could see quarter over quarter EBITDA growth throughout the remainder of 2017.
“At our June TMT conference, mgmt. remained confident in the stability of the business and achieving guidance, though softened language on the dividend policy,” Cowen said. “That said, our model shows a solid runway of FCF coverage (real or adjusted), and despite what seemed like leaving the door slightly open for a div. cut, mgmt. finished our conference conversation feeling comfortable with its current capital policy.”
In the longer term, Cowen said that Windstream “is positioned to dominate the SD-WAN market in the mid-market vertical.”