New Lumen Management Team Tosses the Kitchen Sink in Painting an Ugly Near-Term Outlook; FVE to $10

Lumen had a disappointing fourth quarter, provided a disappointing 2023 outlook, and intends to spend heavily on a declining business. After two big divestitures and a leadership transition last year, we see this as CEO Kate Johnson taking the opportunity to completely reset expectations and do away with any pretense of near-term hope for improvement in business performance. We’re concerned, however, that high spending plans—including fiber capital investment as well as new operating expenses in areas like marketing and salespeople, platform simplification, enterprise resource planning, and digitization—isn’t the antidote to reverse Lumen’s decline, making it a poor use of cash. We’re adjusting our model to account for much higher costs but not making much change to our continually declining revenue forecast, leading us to reduce our fair value estimate to $10 from $14.