Buy LUMN with 3.85x upside & $5 hidden value !
In my 30 Dec 2023 post, I shared about my “LUMN shares bought on a whim” without doing a detailed homework about the stock (click here ! to read about it).
Although it is not a lot of outlay, it was unusual of me to buy on a whim.
To backfill this glaring gap, I decided to dig a little deeper and find out more about Lumen.
Lucky me, I found a recent post (dated 18 Jan 2024) and I would like to share further. (see below)
$Lumen Technologies(LUMN)$ looks super cheap!
Its price is tiny compared to what it sells ($0.11 for every $1 !).
Unfortunately, everyone's scared because they are unsure if Lumen can fix itself and grow again.
And that is a good thing!
As Warren Buffett says, "Be greedy when others are scared."
The “seeking alpha” post attempts to show that Lumen is actually doing okay and is not in a financial crisis. In fact, it reveals that Lumen is worth more than its current price.
For long-term investors who like a bit of risk, Lumen is a steal! Buy and hold on tight!
Fundamental analysis
According to the 10-K report, Lumen Technologies is:
An international facilities-based technology and communications company.
Operates approximately 160,000 on-net buildings and 400,000 route miles of fiber optic cable across 60 countries.
Major portion of revenue is generated from enterprise & commercial customers under segment — “Business”. (see above)
Remaining contribution is from segment — “Mass Market”.
Lumen's Balance Sheet: Zoom-in look
(1) Lumen’s Indebtedness.
Let’s begin with Lumen’s financial health by looking at its Debt. (see above)
As of 30 Sep 2023, Lumen had a whopping $20 Billion hanging over its head.
It is a big number, considering the company's 2022 Total Revenue was only $17.5 Billion.
The “consolation” is that most debt will not due anytime soon. (see above)
Less than $200 Million needs to be paid back by the end 2024.
This gives Lumen plenty of breathing room.
In addition, major percentage (88%) of debt will be due in 2027 and beyond.
Again, this means, Lumen has time to figure out how to handle it without scrambling.
(2) Free cash flow (FCF) & Credit line.
Lumen is not completely cash-strapped.
As of 30 Sep 2023, it had > $300 Million in cash (on hand).
Their current ratio (which measures a company's ability to pay its short-term debts with its short-term assets), was well above 1, implying Lumen is in a good position to meet its immediate financial obligations.
Finally, Lumen has a $2 Billion revolving credit line to tap into during contingency as well.
(3) Lumen - Debt vs Profit.
Lumen has a lot of debt to deal with, while its profits paint a mixed picture.
Operating income (money company makes, less basic expenses) took a sharp tumble since early 2022. (see above)
Even with the decline, Lumen still managed to earn $1.6 Billion in operating income over the past 12 months (TTM).
This works out to an +11% profit margin compared to its total sales over the same period.
Before the slump, Lumen was a profit machine, generating >$4 Billion in operating income with a healthy 20-21% margin.
(4) Lumen's Profits Plunged: What to know?
Studying Lumen's past 3 years earnings, it tells a story. (see above)
(1) Expenses have not changed much YoY, even dipping marginally in some quarters.
(2) Revenue.
The issue is sales crashed big time.
This is due to a major decision Lumen undertook in October 2022.
They sold off their ILEC (incumbent local exchange carrier) business in 20 states.
*Note: the divestiture of ILEC was not a last-ditch effort. It was a strategic move to focus on more profitable, enterprise-oriented services.
The “NEW” normal.
This means Lumen's (a) profit margin, (b) percentage of each dollar earned that is left as profit, will not go back to what it was before.
Investors need to adjust their expectations on lower numbers from now on.
While operating margin is in single digit, it is still positive. Implying Lumen is still making money, just not as much as before.
(5) The NEW Enterprise Oriented services.
Lumen's shifting focus to enterprise services is strategic & well placed to ride the wave of a growing need for business data and connection.
It is a known fact that businesses are slower to change versus an individual or a household.
But the digitalization change is inevitable.
When they do, it's a big shift, leading to massive improvements.
Lumen understands that businesses want to be efficient and profitable and sees the “hidden” potential within streamlining processes and improving business process analytics.
The “Connected Enterprise Market” valued at $281.8 Billion in 2022 is anticipated to grow by over ten folds to 2.98 Trillion by 2030, 8 years’ time. (see above)
It will be a huge windfall for Lumen to have a big chunk of this business.
With Asia Pacific’s connected enterprise market expecting a >30% compounded annual growth, will Lumen presence in Singapore and Japan capture a chunk of this business?
(6) New outlook.
During the Q3 2023 earnings call, the management shared the vision of a future growth driver for the company.
It will be new capabilities — Network-as-a-Service ("NaaS").
Lumen has already entered this space with its first NaaS offering - "Lumen Internet On-Demand", available across various industries.
Overall NaaS industry is expected to grow at a stellar 35% CAGR for the next few years.
Lumen is poised to be the leader in the NaaS product, given its notable experience and extensive assets base in the connectivity business.
It is worth mentioning that Lumen's NaaS offering has been called an "industry disruptor" by Telecom Review. (see above)
(7) Valuation analysis.
Over the last 10 years, Lumen has lost around -95% of its value. (see above)
It currently trades closer to the lower edge of the last 52 weeks' range.
During early December 2023 rally, Lumen demonstrated solid short-term gain of +17%.
(8) Lumen's Fair Value ?
Estimating Lumen's fair price involves a technique called discounted cash flow (DCF) analysis. This considers future earnings and accounts for their present-day worth.
One key factor is the cost of capital — how much investors expect in return for taking on risk. For Lumen, FinBox suggests an 11% cost of capital, which will be used as a discount rate in the DCF analysis.
Analysts predict declining sales for Lumen over the next 5 years. This conservative outlook is adopted here to avoid optimistic assumptions.
Given Lumen's significant debt, a cautious approach is taken to estimate its free cash flow margin, the percentage of revenue turned into readily available cash for investors.
While the past 5 years averaged almost 11%, a very conservative 4% will be used in the analysis.
Similarly, a slow and steady constant growth rate of 0.25% will be assumed for earnings beyond the next 5 years.
These conservative choices may result in a lower estimated fair price for Lumen compared to more optimistic assumptions. However, it avoids potential pitfalls of overly hopeful predictions. (see below)
Results:
Total value of discounted cash flows (DCF) returned by data modelling - $5 Billion.
Shares outstanding - 984 million.
Formula: Fair share price = (DCF / shares outstanding).
Fair share price is $5.08 per share.
LUMN closing price on Fri, 19 Jan 2024 - $1.32 per share.
Fair share price is 3.85 times higher than current share price, a "multi-bagger" upside potential.
Challenges & Opportunities.
Though optimism surrounds Lumen's potential revival, the journey would not be swift and without obstacles.
Management Prowess and Uncertainty: While new leadership's actions have been promising, their time at the helm is brief. Uncertainty about their ability to fully execute the turnaround plan persists for now.
Technological Crossroads: The rapidly evolving tech landscape presents both opportunity and danger. The bandwidth, growth demand could outpace Lumen's network capacity, necessitating heavy investments in expansion.
This capital-intensive endeavor carries the risk of budget overruns and longer payback periods, potentially disappointing investors and triggering further stock selloffs.
Investor Sentiment Shift: Years of declining stock price have entrenched a cautious market attitude towards Lumen.
Rebuilding positive sentiment demand consistent delivery of above-consensus earnings alongside debt reduction efforts.
It will take several “exceed estimates” quarters to achieve.
Debt Dilemma: While the current debt level might not pose immediate credit risk, it significantly restricts Lumen's financial flexibility.
Limited headroom for further debt financing could hinder the company's ability to capitalize on attractive growth opportunities.
My viewpoints: (mine & mine only)
I felt “vindicated” after reading the post because overall review of LUMN is positive.
The previous management did not socialize or did poorly, resulting in investors’ sell off after their money-spinner ILEC businesses were sold off.
When quarterly earnings reported declining sales (after ILEC sales), instead of withholding dividend payouts, the old guards continued, further depleting its cash pile.
It’s a case of “mismanagement” ?
With a new CEO from Microsoft US and a new Chief Product officer from Amazon Web Services, will they be able to leverage on their past experiences and navigate Lumen to higher grounds?
The prospects are there, what’s left is opportunities and a stronger US economy.
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Do you think Lumen Technologies’s new CEO will be able to turn things around?
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Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
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