One of the country's largest telecom service providers, CenturyLink, saw its profits dip by more than 50% to $109 million in the recent fourth quarter from the year-ago period. Even so, the stock looks like a good long-term play to me.
Let's dig deeper and revisit what's fundamentally strong about this company.
Significant acquisitions
CenturyLink has been diversifying its business through mergers and acquisitions for quite some time now. The company's merger with Qwest last April provided it with a larger geographical reach in 37 states through a 190,000-mile fiber optic network. The combination has also helped the company leverage growth in the wireless connections space by offering fiber-to-tower services to wireless operators.
CenturyLink also gained a significantly larger footprint in the booming cloud computing space in July last year with the acquisition of leading market player Savvis for $2.5 billion. The deal gave CenturyLink access to many more data centers and expanded its cloud computing business across North America, Europe, and Asia. Of late, the company has also extended its reach in Japan, thanks to the launch of enterprise cloud services by Savvis.
The International Data Corporation is expecting spends on cloud computing services to touch a whopping $72.9 billion by 2015. Industry peer Verizon also expanded its cloud business with the acquisition of Terremark in April last year. But then, I think it's "advantage CenturyLink" here. Apart from an international focus and real muscle in the cloud space, the two acquisitions give CenturyLink a much greater scope to take on peers AT&T and Verizon in the cloud computing business.
Ability to overcome hurdles
While CenturyLink has been busy making its business future-proof, its wider expansion into the fiber optic and cloud computing space has not come without a few hiccups. The company's administration costs, coupled with interest expenses, went up significantly as it took on more debt to pay for its acquisitions in 2011. However, I believe synergies from the acquisitions should offset these expenses and would not weigh down on CenturyLink's growth in the long run. What's more? The company is a great buy for its fantastic 7.8% dividend yield.
The Foolish bottom line
CenturyLink is making all the right moves to ensure the sustainability of its business as a whole. I remain optimistic about the company's future. What about you? Let us know by leaving your comments in the box below.
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Raj Rajput [ MBA ]
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