Lumen Technologies (LUMN), the telecom company formerly known as CenturyLink, has lost 86% of its value since its rebranding and ticker change on Sept. 18, 2020. The S&P 500 rose 39% during the same period.
Lumen's stock plunged as its business and residential wireline businesses in general struggled to keep pace with their larger competitors. The macro headwinds also throttled the growth of its enterprise-facing services, while its widening losses and soaring debt forced it to eliminate its dividend last November. But could this out-of-favor stock bounce back over the long term and reward its contrarian investors with millionaire-making gains?
Image source: Getty Images.
How bad were Lumen's numbers?
Over the past decade, AT&T and Verizon Communications expanded their higher-growth wireless networks while downsizing their slower-growth wireline networks. But instead of following that trend and expanding into the wireless market, Lumen doubled down on the legacy wireline market through a series of mergers and acquisitions while expanding its portfolio of cloud, security, and collaboration services for enterprise customers.
Lumen originally planned to leverage the increased scale of its wireline business to generate slow but stable growth. Unfortunately, that core business continued to shrink as the market's demand for fresh wireline connections dried up. Its bundled cloud-based services also faced stiff competition from other tech companies.
The only bright spot has been Lumen's fiber business, which continues to gain new subscribers and accounted for 32% of its total broadband revenue in the third quarter of 2023. But as the following table illustrates, that growing broadband business couldn't offset the persistent declines of its other legacy wireline businesses.
| Metric | 2020 | 2021 | 2022 | 2023 (Forecast) |
|---|---|---|---|---|
|
Total revenue |
$20.7 billion |
$19.7 billion |
$17.5 billion |
$14.5 billion |
|
Revenue growth |
(4%) |
(5%) |
(11%) |
(17%) |
|
Adjusted EBITDA margin |
41% |
42.8% |
38.4% |
31.3% |
|
Net income (loss) |
($1.2 billion) |
$2 billion |
($1.6 billion) |
($8.3 billion) |
Data source: Lumen Technologies.
That slowdown was exacerbated by the macro headwinds and the divestments of several of its business units to stabilize its margins and debt. But it could be tough for Lumen to stay afloat in this challenging market -- it ended its latest quarter with $19.7 billion in long-term debt and just $311 million in cash and equivalents.
That gives Lumen a shockingly high net debt-to-EBITDA ratio of 6. AT&T and Verizon ended their latest quarters with net debt-to-EBITDA ratios of 3 and 2.6, respectively.
Can Lumen stay solvent until its business stabilizes?
The bears believe Lumen will likely go bankrupt before it stabilizes its business. However, Lumen recently bought itself more time by securing a new agreement with its creditors that will push back the maturities for a large portion of its existing debt while granting it access to an additional $1.2 billion in high interest rate loans. It also expects a tax refund of $900 million to boost its near-term liquidity. Analysts expect Lumen's revenue to continue declining in 2024 and 2025, but they believe it can return to profitability in 2025 as it cuts costs and divests more business units.
Based on those expectations and its enterprise value of $19.4 billion, Lumen's stock looks cheap at less than 5 times next year's adjusted EBITDA. However, AT&T and Verizon also trade at about 5 times next year's adjusted EBITDA.
Lumen's stock could stay in the penalty box until it gets its act together, but insiders are warming up to it again. Over the past 12 months, they bought three times as many shares as they sold. Its CEO also recently bought a million shares while its CFO scooped up half a million shares.
Could Lumen generate millionaire-making returns?
Lumen isn't down for the count yet, but it won't generate millionaire-making gains anytime soon. Its low valuations could limit its downside potential, but its upside will also be limited until it stabilizes its net losses and meaningfully reduces its debt.
Its lack of a dividend will also make it less appealing than AT&T and Verizon -- which both pay forward yields of nearly 7%. So for now, investors should focus on other value plays or income stocks instead of betting on Lumen's long-shot turnaround.
