Shares of Lumen are trading at 35-year lows
Lumen Technologies Inc. isn’t exactly in the best company among the S&P 500’s laggards this year.
Of the eight worst-performing names in the index so far in 2023, seven are beaten-down bank stocks, including SVB Financial Group SIVB and Signature Bank SBNY, whose corresponding banks have collapsed and been taken over by the government. SVB and Signature shares are halted and are due to be booted from the S&P 500 SPX after today.
The lone nonbank name among the bottom eight is Lumen LUMN, the telecommunications company once known as CenturyLink that continues to see its legacy wireline business struggle. The stock is off about 50% so far this year, after it declined 58% in 2022 to mark its worst annual performance on record.
Lumen shares fell 20.8% in the session following the company’s latest earnings report, which brought a downbeat outlook. Shares closed at $3.95 after that early February report, and they’ve continued to sink since then. They finished the past two sessions at $2.60, their lowest closing level since Jan. 15, 1988, according to Dow Jones Market Data.
Half of the analysts who cover Lumen’s stock rate it a sell — a rarity among S&P 500 components. Within the index, only Principal Financial Group PFG has a higher portion of sell ratings, at 53%, while T. Rowe Price Group Inc. TROW matches Lumen at 50%. Those two investment managers are struggling amid outflows to exchange-traded funds from mutual funds.
At $2.6 billion, Lumen’s valuation is the lowest among S&P 500 components. The company eliminated its dividend in November while authorizing a buyback program of up to $1.5 billion. About a decade ago, when its corporate name was still CenturyLink, the company made a similar move to reduce the dividend while announcing a share-repurchase authorization.
Lumen’s recent stock slide prompted one bearish analyst to ask whether sentiment was too negative. MoffettNathanson analyst Nick Del Deo remarked in an early March note that “everything has a price,” adding that “the sharp deterioration in the stock price and the market’s expectations for the company made us think: would an upgrade, even if tactical in nature, be appropriate?”
At the time, Lumen shares were trading at $3.23, and Del Deo decided against an upgrade. Lumen “may have ‘kitchen sinked’ its 2023 outlook,” he wrote, but even if the company were to top earnings expectations for the year, “the market will increasingly focus on other challenges” including revenue pressures, competitive developments and a tough cash-flow picture.
Morgan Stanley’s Simon Flannery also weighed in on Lumen’s continued stock slide, cutting his price target on the name to $2.50 from $6 in a Monday note to clients.
“Lumen’s market capitalization of [circa $3 billion] is dwarfed by a debt stack of more than $20 [billion],” he wrote. “We have also seen a dramatic selloff in Lumen’s debt, with several ratings agency downgrades.”
Like Del Deo, Flannery noted that the “recent correction raises the question of whether the selloff is overdone or whether there is more to go,” and he landed at the same conclusion, reiterating his bearish rating.
“We retain our Underweight rating as we continue to see downside risks and do not expect clear evidence of an inflection in performance in the near-term,” Flannery concluded. “Having said that, it is possible that the stock could perform better if it becomes clear that guidance is overly conservative or if the company could find other sizable asset monetization opportunities.”
Lumen’s near-term liquidity profile looks solid, in Flannery’s view, and the company should benefit financially in 2024 from the sale of its business in Europe, the Middle East and North Africa.
But “credit markets are currently pricing in a much more negative outcome than the equity markets,” Flannery wrote, adding that he sees rising risks for the company in the medium term. Given Lumen’s capital structure in the current environment, the company may have to shy away from some investments, which in turn might hurt its competitive stance.
One positive, he noted, is that Lumen’s new management “plans to stabilize revenues and EBITDA [earnings before interest, taxes, depreciation and amortization] exiting 2024 with growth targeted thereafter” and is expected to share more information about its plans at a June investor day.
“On the other hand, Lumen and many of its peers have experienced ongoing top- and bottom-line pressures for many years reflecting secular and competitive pressures, with little visibility on a return to growth,” Flannery wrote. “Lumen’s enterprise business continues to see mid-single-digit top-line declines, which could accelerate in the near term as the company exits less profitable lines of business.”
In addition, a recession could put the company’s business customers under pressure and force them to cut back on information-technology spending, he noted.
