Shares of Lumen Technologies (LUMN 3.00%) rallied 32.8% in February, according to data from S&P Global Market Intelligence.
The beaten-down fiber and broadband network company might be prone to big spikes from time to time, as its stock trades at a distressed valuation while the company grapples with a high debt load. Distressed companies can have massive upside, if management is able to engineer an unlikely turnaround.
Lumen's fourth-quarter earnings report seemed to show hints of a potential turnaround in the making -- although investors certainly aren't out of the woods by any means.
NYSE: LUMN
Key Data Points
Things are getting less bad, and that's good
In the fourth quarter, Lumen's revenue declined 7.2% to $3.52 billion, with adjusted (non-GAAP) earnings per share of $0.08. While those figures don't exactly scream out "massive gains," the figures were better than expected.
Moreover, Lumen is under new management since November 2022, when CEO Kate Johnson took over and began to implement her plan to turn the ailing wireline network company around. The important thing to note in the February report was that parts of the plan appear to be bearing fruit.
For instance, Lumen had divided up its enterprise products into three distinct groups named "Grow," "Nurture," and "Harvest," which mean exactly what one thinks they would mean: Lumen will invest behind newer growth products and services, maintain low-growth "nurture" products, and "harvest" cash flow from declining products that are becoming obsolete.
Lumen's headline numbers show the cumulative effect of all its products. In the fourth quarter, the "grow" portion of enterprise revenue actually grew 5.7% year over year, even as overall North American enterprise revenue fell (3.4%). But as the "grow" portion nears 50% of total enterprise revenue, that could very well return the overall segment to growth some time in the future.
By the same token, Lumen also reported an 11.5% increase in its fiber consumer broadband offerings, which was offset by the (12.5%) decrease in legacy broadband technologies, making for an overall consumer segment revenue decline of (8.3%). While fiber broadband is a smaller part of the consumer division, it will become a bigger portion over time if these trends hold up.
Management says 2025 will see a return to growth
Management believes continued execution of the turnaround plan will return the company to growth by 2025. If that happens, Lumen could get a large rerating higher. Currently, the company only has a market cap of $1.8 billion, which amounts to less than half the $4.2 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) Lumen projects for this year.
Of course, there's more to the story, namely Lumen's roughly $20 billion in debt. The massive debt load on a currently declining business increases the chance of bankruptcy.
However, management recently reached a deal with some of its creditors to extend maturities on debt that was maturing before 2027, which will now be moved further out to the 2029-2030 period. While the deal hasn't officially closed, management noted on the conference call with analysts it expects the creditor agreement to close this quarter.
If that deal closes, it will give management more breathing room to continue its turnaround plan. Overall, Lumen remains a high-risk stock capable of going to zero, but also one with significant upside if it can muddle its way back to growth. It remains appropriate only for high-risk investors OK with losing all their principal. That being said, the picture got incrementally better in light of last month's report.
