Tuesday, January 29, 2008

CTL- Centurytel at $35, this is a phone-line company in mostly rural areas, about a $3.8Bln market cap and $3Bln in debt. 11.5x P/E, with approximately $600Mln in trailing free cashflow (actual). Calculated a different way (with more onerous tax assumptions), Centurytel's profitability is mapped out below.

Ebitda- 1325
-interest -220
-taxes(.35)- -350
Capex -300
FCF- $455 (ebitda method fcf)

That equates to about a 12% FCF yield ($455/$3.8Bln), but its actually closer to a 16% yield since I overstated their actual cash taxes. They have a share repurchase authorization for $750Mln, which is like 18% of their shares outstanding. 10% of their stock is held up in 401K/esop plans which means even fewer sellers will be out in the marketplace. This should easily trade up until the implied freecashflow yield is something closer to 8%, which would equate to about $48.80/share , based on a low-end free cashflow forecast of $430Mln/8%= $5,375Mln $5,375Mln/110Mln shares= $48.86 per share This implies 40% upside in the stock.

The company has a lot of debt, which will likely increase given the buyback, but they continue to do a good job switching old phone-line customers over to DSL packages and they should trade at a premium to Citizens Communications (CZN). Currently, CZN trades at EV/sales of 3.7x and ev/ebitda of 6.7x, while CTL trades at 2.6x sales and EV/Ebitda of 5.14x. Both of these multiples imply a 30-40% valuation gap between these similar companies. The free-cashflow numbers make Citizen's still look cheap ($740Mln/$3600= 20% FCF yield), but I believe this represents lower capital investment spending in their infrastructure, which may ultimately come back to bite them. I think the valuation gap mostly exists due to CZN paying a cash dividend of 9%, while CTL pays a yield of .8% (CTL pays its cash through share repurchases, which should prove more efficent as long as they avoid dilutive acquisitions).

Thought this was an interesting equity idea, but would be hesitant to buy the bonds due to the fact that they pay out all of their cash.

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