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Mi interessa anche se non ho Lumen ma ho parecchi BB Qwest che è parte delle galassia Lumen. Grazie.
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Lumen Technologies: A Solid TurnaroundPlay
Jan. 18, 2024 7:19 AM ET |
Lumen Technologies, Inc. (LUMN) Stock |
34 Comments |
KM Capital
57
Follower
s
Summary
12 Likes
Lumen Technologies is a global technology and communications company witha large amount of debt but suffi cient liquidity.
Substantial pessimism around the stock in recent years is due to fears that themanagement's turnaround plan will fail and the company will go bankrupteventually.
I consider these fears to be an overreaction because the business is stillprofi table and the risk associated with high debt levels is mitigated by thetimeline of principal repayments.
My target price for LUMN stock is $5.
Introduction
Fundamental analysis
Pgiam/iStock via Getty Images
Encountering Lumen Technologies' (
NYSE:
LUMN
)
valuation ratios
, particularly theshallow 0.11 price-to-sales relationship, was truly astonishing. The substantialpessimism around the stock is mainly due to the extreme uncertainty regardingLumen's ability to successfully conduct
its turnaround plan to unlock new seculargrowth drivers. However, I believe that the extract from one of the most famousquotes by Warren Buffett, which says, "Be Greedy When Others Are Fearful," fi tswell when we speak about Lumen. My fundamental analysis suggests that thecompany still does well across different key metrics, and its balance sheet is not thatweak. My discounted cash fl ow analysis shows that the stock is multiple timesundervalued. In summary, I believe that Lumen provides a strong turnaround play forlong-term investors seeking a decent high-risk and high-reward opportunity. Theupside potential outweighs the risks here, which makes me give LUMN a "Buy"rating.
According to the
10-K report
, Lumen Technologies is an international facilities-basedtechnology and communications company. The company operates approximately160,000 on-net buildings and 400,000 route miles of fi ber optic cable across 60countries. The major portion of revenue is generated from enterprise and commercialcustomers under the Business Segment. The remainder is contributed from the MassMarket segment.
Lumen
I want to start my fi nancial analysis by emphasizing Lumen's balance sheet due tothe substantial amount of debt. Lumen had more than
$20 billion
in total debt as ofthe latest reporting date, September 30. The amount is huge for Lumen; thecompany's total 2022 full-year revenue was $17.5 billion. But the good side is thatless than $200 million is due by the end of 2024. About 88% of the total debt is duein 2027 and thereafter, meaning Lumen has suffi cient space for maneuvering. Lumenhad more than $300 million in cash as of September 30, and its current ratio waswell above 1. The $2 billion revolving credit line facility is also available to Lumen. Tosum up, Lumen has suffi cient liquidity.
Lumen
Now, I want to look at how the company's substantial outstanding debt looks againsttrends in profi tability. As can be seen below, there was a sharp decrease in theoperating income since early 2022, but still, the TTM operating income of $1.6 billionrepresents almost an 11% margin compared to the TTM revenue. Before the sharpdecline, LUMN generated more than $4 billion in operating income, which wasaround 20-21% in operating margin.
Data by
YCharts
We need to understand the reasons for such a sharp operating income decline toassess whether the drawdown is temporary or not. When I look at the company'squarterly
fi
nancial performance
in 2022 and 2023, I see that the costs side did notchange much on a YoY basis, even demonstrating slight declines. The problem hereis that revenue declined substantially, which is linked to the company's
October 2022divestiture
of a notable part of the ILEC business across 20 states. That said, thedecline in the operating margin of LUMN is not temporary and now investors shouldget used to new levels of this profi tability metric. Lumen's operating margin is now insingle digits but is still far above zero. It is also important to understand thatdivestiture is not a desperate move but rather a strategic step to reshape thecompany's business to be more enterprise-oriented.
SA
The strategic shift towards focusing on enterprise services looks sound to me, giventhe expected growing demand for data and connectivity services for businesses. Welive in a world where households and individuals are more digitalized thanbusinesses because the smaller the unit is, the more fl exible it is to changes. But thetrend towards more digitalization, which will require more connectivity, is inevitable. Iam quite sure about this trend's sustainability because businesses seek to achievemore effi ciency and higher profi tability, and the massive potential is hidden withinstreamlining internal processes and improving business process analytics. Overall,the connected enterprise market is expected to grow by
about
tenfold over the nexteight years, which is a strongly favorable shift for Lumen. And I believe it willsnowball because the more sophisticated digital platforms are used, the higher thedemand for connectivity and bandwidth will be.
psmarketresearch.com
Although Lumen is considered by investors to be a poor investment, which I see fromthe stock price dynamics over the long term, I believe these fears are in the rearviewmirror. It seems that the previous management did not do much to address the trendof the declining demand growth for mass markets and made some quite poor capitalallocation moves. For example, the company paid out $11.4 billion in dividendsbetween 2013 and 2022, and at the same time, the debt level grew substantiallybetween 2013 and 2021. The dividend was eliminated at the end of 2022, debt levelsare still substantial, and the company has sold its quite profi table ILEC operations.These all look like quite poor capital allocation moves, but I attribute all of them to theprevious management.
As of today, it is important to acknowledge that the company is exposed to apromising business connectivity market, where the demand growth for bandwidth willbe solid for the next decade. The company has an extensive long-haul fi ber networkof over 450,000 route miles in its network, which is not replicable. The new CEO,who stepped in early 2023, has already demonstrated solid moves, which included
headcount cuts
and seeking opportunities to
restructure the debt
. The
appointment
of Satish Lakshmanan as Lumen's new chief product offi cer, who previously servedas the global leader for artifi cial intelligence services at Amazon Web Services, willalso highly likely add value to the company's ability to innovate.
Valuation analysis
Lumen
During the
Q3
earnings call, the management shared the vision that one of the futuregrowth drivers will be new capabilities like
Network-as-a-Service
("NaaS"). Thecompany already entered this space with its fi rst NaaS offering called "LumenInternet On-Demand", which is already available across various industries. Thisendeavor looks very promising because the overall NaaS industry is expected togrow at a stellar
35%
CAGR for the next several years. This is a massively favorabletrend for Lumen, especially considering the company's notable experience andextensive assets base in the connectivity business. It is worth mentioning thatLumen's NaaS offering has been called an "industry disruptor" by
Telecom Review
.
To summarize my fundamental analysis, the new management's strategic shifttoward enterprise clients is sound, considering the expected rapid growth of thedemand for bandwidth from businesses. The company's extensive asset base andvast expertise in connectivity make Lumen fi rmly positioned to benefi t from theoverall global digitalization trend, which will inevitably drive up the demand forconnectivity services. The new management also has initiatives in cost optimizationand balance sheet improvement. All these measures should create sustainable valuefor shareholders over the long term, especially considering industry tailwinds like theexpected rapid transition from traditional networking to NaaS.
The stock lost around 95% of its value over the last decade and currently tradescloser to the lower edge of the last 52 weeks' range. LUMN demonstrated solidshort-term momentum with a 17% rally within the last month.
Risk factors
SA
To derive LUMN's fair price, I will run a discounted cash fl ow ("DCF") model. FinBoxsuggests an
11%
WACC for LUMN. I use it as a discount rate for my DCF.
Consensus
revenue growth projections for the next fi ve years are very conservativeas they project a decline in sales. I prefer to be conservative, too and will applyconsensus forecasts here. Considering LUMN's substantial indebtedness, Iimplement a very conservative 4% free cash fl ow margin, which is more than twicelower than the last fi ve years' average of almost 11%. I also use a very conservativeconstant growth rate of just 0.25%.
Calculated by the author
The total value of discounted cash fl ows returned by my DCF model is $5 billion.When I divide it by 984 million shares outstanding, I get the fair share price of $5.1.This is multiple times higher than the current share price, which means a "multi-bagger" upside potential.
Conclusion
This article was written by
Even though I am optimistic about the company's turnaround prospects, it is unlikelyto be an overnight process. The company can face notable challenges before allpotential benefi ts are unlocked. While the new management's moves have beensound so far, the team's tenure as LUMN's leadership has been relatively short, andthere is still a high level of uncertainty regarding this management's ability tocomplete turnaround plans successfully.
The rapidly evolving technological environment also poses substantial risks forLumen. The bandwidth demand growth might outpace the company's capacity,forcing Lumen to invest heavily in its network capacity expansion. The business iscapital intensive, which means there are substantial risks of capex budget overrunsand investment payback horizons being longer than planned. If such a scenariounfolds, this might lead to the investors' disappointment and further stock sell-off.
When the stock price has consistently declined for several years, it might take a longtime for the sentiment to become more optimistic. Without the improved investors'sentiment around LUMN, it would be diffi cult to expect a spike in the demand for thestock. It could take several quarters of delivering earnings above consensus coupledwith deleveraging that might return positive sentiment around LUMN.
Also worth mentioning is that while I believe that the company's current substantiallevel of debt does not mean a signifi cant credit risk, I have to emphasize that highleverage limits adversely affect Lumen's fi nancial fl exibility if a new promisinginvestment opportunity pops up. Having a highly leveraged balance sheet meansthere is not much room to raise more debt fi nance, and potentially good growthopportunities might be missed due to this factor.
I recognize all the risks and uncertainties related to investing in LUMN, but it isapparent to me that the massive upside potential makes the stock a very good high-risk, high-reward play. It seems that the current valuation refl ects the worstscenarios, including bankruptcy, but my fundamental analysis suggests that LUMNstill has resources and suffi cient profi tability to survive the ambitious turnaroundsuccessfully. The substantial amount of total debt on the face of the balance sheetshould also not mislead investors because the lion's part of it is due after 2027. Toconclude, LUMN deserves a buy rating as it represents a good play for investors witha high tolerance to risk.
KM Capital
57
Follower
s
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Analyst’s Disclosure:
I/we have no stock, option or similar derivative position in any of the companies mentioned, and noplans to initiate any such positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I amnot receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whosestock is mentioned in this article.
Seeking Alpha's Disclosure:
Past performance is no guarantee of future results. No recommendation or advice is being givenas to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not refl ect thoseof Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investmentbank. Our analysts are third party authors that include both professional investors and individual investors who may not belicensed or certifi ed by any institute or regulatory body.
Coming from an IT background, I have dived into the U.S. stock market seven years ago by managingportfolio of my family. Starting managing real money has been challenging for the fi rst time, but long hours of
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