What happened
Shares of Lumen (LUMN) are posting big gains in Wednesday's trading. The telecom's stock was up 16.7% as of 11:30 a.m. ET, according to data from S&P Global Market Intelligence.
Top U.S. telecommunication stocks are rallying today as investors reassess risks related to recent reports about lead-coated copper cables. Notably, AT&T published a filing saying that less than 10% of its domestic copper-wire telecom network uses lead-coated cables, prompting gains for its stock and other telecom players, including Lumen.
So what
The Wall Street Journal published a report on July 9 stating that there was a risk of lead contamination from more than 2,000 telecommunications cables across the U.S. The report prompted stark valuation pullbacks for top domestic telecom companies. But AT&T's report on lead-cable usage seems to be assuaging fears about telecoms.
While Lumen is transitioning its focus from copper-based telecom services to fiber lines, its legacy businesses still account for a substantial portion of revenue. The issue of potential lead contamination has raised the possibility that telecoms will incur high costs replacing cables and be exposed to lawsuits. But following AT&T's recent filing, investors seem to be reassessing the amount of risk posed by lead-coated cables.
Now what
Even with today's rally, Lumen stock remains down roughly 64% across this year's trading. It's also down roughly 95.5% from its 10-year high. Based on current prices, the company is valued at just 13% of this year's expected sales.
LUMN PS ratio (forward) data by YCharts. PS = price to sales.
For better or worse, the potential lead-contamination issue is just starting to unfold. While it's possible that additional testing will show lead-coated telecom cables haven't caused meaningful environmental harm, predicting how things will shake out involves plenty of guesswork at this point.
Lumen continues to look cheaply valued based on some metrics, but there are big issues facing the business. It's hard to get a read on the lead-contamination issue based on currently available information, and the stock remains a high-risk, high-reward turnaround play.
