Shares of beleaguered telecom Lumen Technologies (LUMN) were on the rise Tuesday, up by 9.1% at one point before settling back to a 4.2% gain as of 12:51 p.m. ET.
Lumen reported third-quarter earnings last week, and the stock plunged in the immediate aftermath. However, over the past few days, its new CEO and CFO each made sizable purchases of the stock on the open market, even though the stock is trading as if bankruptcy is a possibility.
Then Tuesday, Lumen released a press release on a new Department of Defense contract win. It appears the vote of confidence from the Dod is adding to the optimism of the past few days.
A skittish market reacts badly to earnings, but there were some positives
Last week, Lumen reported third-quarter results that actually beat revenue expectations, but it missed on the bottom line.
The market is in an unforgiving mood, especially when it comes to highly indebted companies, and even more so when it comes to companies that are reporting declining revenues and profits. Part of Lumen's revenue declines are due to the fact that it has divested itself of several of its businesses over the past 18 months -- indeed, it just announced another divestiture. It's selling its Europe/Middle East/Africa (EMEA) business for $1.5 billion.
Those moves have brought the company's overall debt load down significantly, but Lumen is a still heavily indebted company, with $19.7 billion in long-term debt as of Sept. 30. But that figure should come down by another $1.5 billion after the EMEA sale.
Of course, it's not just that Lumen has a lot of debt. Its revenues and profits are also in decline, even taking into account the divestitures. Revenue declined 17.1% last quarter, but on an adjusted-for-divestitures basis, revenue was still down 5.3%. In addition, Lumen has had recent proactive discussions with some of its creditors, which extended maturities on some of the company's debt, waived covenants, and agreed to supply up to another $1.2 billion of financing.
Needless to say, Lumen is in transition right now and attempting a turnaround. The good news is that it has new management, with CEO Kate Johnson having come on board from Microsoft in November 2022.
After the Q3 report last Thursday, Johnson purchased nearly $1 million of Lumen stock in the open market. That was followed Friday by CFO Chris Stansbury purchasing nearly $550,000 of stock.
Those certainly look like votes of confidence in the company, and Lumen's share price has been rising ever since. Johnson's turnaround plan, which includes new innovations such as fiber-to-the-home deployment for consumers and a new network-as-a-service (NaaS) option for enterprises looking to reduce costs and increase agility, is still in its early stages.
Then Tuesday, Lumen announced a new $110 million five-year contract to support the secure networking needs of the Department of Defense. While the award won't necessarily be a needle-mover for the company financially, as Lumen made over $3.6 billion in revenue last quarter alone, it was encouraging, as it certainly lends credibility to Lumen's security capabilities. Furthermore, the Defense Department might not be so keen on renewing contracts with a provider that might be out of business anytime soon.
Lumen is still a high-risk play
Investors should take care to recognize that just because insiders are purchasing stock in a show of confidence, that doesn't necessarily mean a company is out of the woods. I have seen cases of insiders buying stock before when the company still ended up filing for bankruptcy. Still, Johnson's purchase of $1 million worth of shares was notably large.
Lumen's stock could be interesting to dig into, but investors will need to follow its turnaround attempt closely, and be prepared to potentially lose their entire investment if this telecom company gets unlucky.
