Story updated at 10 a.m. to reflect market activity.
CenturyLink fell 0.2% to $34.67 in morning trading.
The firm set a price target of $33 for the telecom company, saying the downgrade is a valuation call.
"We see potential risks in several parts of the business and believe other stocks we cover offer better risk/reward tradeoffs," analyst Kevin Manning wrote. "Despite solid 4Q13 results, we continue to have concerns about the CLTS (CenturyLink Technology Solutions, formerly Saavis) data hosting business as CLTS's target customer is shifting from high-touch large enterprise to more regional and SMB CTL enterprise customers. The Tier 3 acquisition is CTL's latest attempt to compete with Amazon, while its high-touch hosting platform has not been upgraded in years. Our checks indicate some top Savvis sellers have left as a result of the Savvis salesforce being integrated into the CTL Salesforce."
Separately, TheStreet Ratings team rates CENTURYLINK INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate CENTURYLINK INC (CTL) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, expanding profit margins and increase in net income. However, as a counter to these strengths, we also find weaknesses including disappointing return on equity, weak operating cash flow and a generally disappointing performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- CENTURYLINK INC has improved earnings per share by 10.8% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, CENTURYLINK INC swung to a loss, reporting -$0.43 versus $1.24 in the prior year. This year, the market expects an improvement in earnings ($2.56 versus -$0.43).
- Regardless of the drop in revenue, the company managed to outperform against the industry average of 2.7%. Since the same quarter one year prior, revenues slightly dropped by 0.9%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
- Net operating cash flow has decreased to $1,151.00 million or 16.53% when compared to the same quarter last year. In conjunction, when comparing current results to the industry average, CENTURYLINK INC has marginally lower results.
- Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Diversified Telecommunication Services industry and the overall market, CENTURYLINK INC's return on equity significantly trails that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: CTL Ratings Report
Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.