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CenturyLink (CTL) Likely to Beat Q2 Earnings: Stock to Gain?

Zacks Equity Research
Updated

CenturyLink Inc. CTL, leading regional wireline service provider in the U.S., is scheduled to report second-quarter 2016 numbers on Aug 3, after market close.

Last quarter, the company posted a positive earnings surprise of 4.41%. Moreover, the company’s earnings surpassed the Zacks Consensus Estimate in three of the previous four quarters, with an average beat of 4.78%. Let’s see how things are shaping up for this announcement.

CENTURYLINK INC Price and EPS Surprise

CENTURYLINK INC Price and EPS Surprise | CENTURYLINK INC Quote

Why a Likely Positive Surprise?

Our proven model shows that CenturyLink is likely to beat estimates because it has the right combination of two key elements.

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Zacks ESP: CenturyLink has an Earnings ESP of +1.70%. This is because the Most Accurate estimate stands at 60 cents while the Zacks Consensus Estimate is pegged lower at 59 cents. This is a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: CenturyLink has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of CenturyLink’s Zacks Rank #3 and +1.70% ESP makes us confident of an earnings beat at the company.

What is Driving the Better-than-Expected Earnings?

CenturyLink has been trying all means to position itself as a global leader in the cloud infrastructure and hosted IT solutions arena. Further, the company’s strong network capabilities and integrated hosting and network solutions will promote growth in the cloud business. CenturyLink’s investments in fiber-to-the-tower (FTTT) have expanded its fiber-based backhaul services. Moreover, the company expects its Managed Office and Managed Enterprise Solutions to continue to gain traction and drive revenues on the back of increasing demand from small and large business customers.

CenturyLink is also on the verge of shifting its business toward cloud by acquiring certain core networking assets from a company formerly known as Active Broadband Networks Inc. Recently, it acquired cloud app management specialist, ElasticBox, in a transaction that will allow its customers to manage applications across 12 different cloud providers including the likes of Amazon.com Inc.’s AMZN Amazon Web Services, International Business Machines Corporation’s IBM Softlayer service, Microsoft Corporation’s Azure and Alphabet Inc.’s Compute Engine.

However, declining legacy voice and access revenues and falling low-bandwidth data services revenues raise concern. Further, intensifying competition, federal regulations and the constant need to upgrade technology are potent headwinds.

Another Stock to Consider

CenturyLink is not the only company looking up this earnings season. Here is another company to consider as our model shows that this also has the right combination of elements to post an earnings beat this quarter.

CDK Global, Inc. CDK, with an Earnings ESP of +4.26% and a Zacks Rank #1.

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Zacks Investment Research