Lumen Earnings: Signs of a Turnaround Are Not Yet Apparent

Lumen’s LUMN second-quarter earnings were poor, as expected, and are tracking full-year guidance. Management continues sounding an optimistic tone about its transition to more modern services, but sales declines are continuing at the same pace as the past few years. Despite its struggles, Lumen is undervalued relative to our $5 fair value estimate, which is underpinned by a forecast that doesn’t assume a drastic improvement. That said, we don’t expect the stock can move much higher until the business improves and quells investors’ fears, which we don’t expect in the next few quarters. We expect Lumen will be able to pay off all debt maturing over the next three years, but if Lumen’s financial performance doesn’t improve by the time it reaches its large debt maturity in 2027, we question its ability to maintain adequate liquidity.

Fear over financial viability is the main reason for the current stock level in our view. Reports in the Wall Street Journal about lead in telecom cabling and Lumen creditors looking for potential debt covenant breaches only increase the angst. We’re not overly concerned about the lead situation. Management said it conducted an initial analysis and found less than 5% of its 700,000-mile copper network contains lead, with most buried or within the conduit. Considering Lumen is busy conducting a major fiber overhaul, we don’t think a requirement to remove copper cables would be devastating. We don’t believe Lumen could withstand an adverse civil judgment, but we think that’s a very unlikely outcome given current information, which doesn’t allege malfeasance or any deviation from standard practices of the 1960s.

Lumen’s second-quarter earnings were poor, as expected, and are tracking full-year guidance. Management continues sounding an optimistic tone about its transition to more modern services, but sales declines are continuing at the same pace as the past few years. Despite its struggles, Lumen is undervalued relative to our $5 fair value estimate, which is underpinned by a forecast that doesn’t assume a drastic improvement. That said, we don’t expect the stock can move much higher until the business improves and quells investors’ fears, which we don’t expect in the next few quarters. We expect Lumen will be able to pay off all debt maturing over the next three years, but if Lumen’s financial performance doesn’t improve by the time it reaches its large debt maturity in 2027, we question its ability to maintain adequate liquidity.