We’re Cutting Our Lumen Fair Value Estimate in Half, but Think Bearishness Is Overdone

Following a terrible 2022, Lumen’s LUMN stock has been atrocious in 2023, with the company’s equity and debt trading like there’s danger of bankruptcy. We’ve taken a close look at Lumen’s financial position and believe the level of fear is too severe. Given the current environment, we have increased the cost of capital we assume for Lumen and have cut our long-term projections. We arrive at a $5 fair value estimate, which is down from the $10 fair value estimate we had previously but remains more than double the stock’s current level.

We see two interrelated reasons why sentiment is so bearish surrounding Lumen. For one, the new management team offered ugly 2023 guidance and provided little hope that 2024 will be better. Also, Lumen has a lot of debt, and perpetual financial performance like management forecast for 2023 would make it difficult for Lumen to ever meet its obligations, which could make necessary refinancing impossible. Our unwillingness to subscribe to this dire view is based on Lumen not needing to roll over any debt until 2027, and it being inconceivable that investors will allow the firm’s cash allocation to look like it does in 2023 for a full five years if there is nothing to show for it.

Revenue and margin profiles for 2023 and 2024 look bad, and the new management team is aggressively increasing capital investment to return the firm to growth, which it thinks is possible by 2025. Management is resetting operations after last year’s divestitures and shutting down subscale and unprofitable businesses. Considering we’ve heard the “return to growth” story for many years, we’re skeptical this will be successful, though we do expect improvement from this honeymoon period. More importantly, we don’t think the company will continue throwing cash at a failing solution. If management shows no progress in its vision to grow, we’d expect much less cash being funneled to “growth spending” and perhaps a sale of assets that we still think have significant value.