Lumen Technologies: Don't Look Back
Nov. 03, 2023 1:53 PM ETLumen Technologies, Inc. (LUMN)
Stone Fox Capital
Investing Group Leader
Summary
• Lumen Technologies is facing constant restructuring and slashing of financial targets, leading to a serial decline in the telecom company.
• The company had to restructure its debt and negotiate with creditors holding $7 billion in debt, with limited free cash flow generation to repay the debt.
• The stock might appear attractive at ~4.2x EV/EBITDA targets, but the debt restructuring and other corporate moves will only lead to weaker financial results.
• I am Mark Holder (aka Stone Fox Capital), a CPA with degrees in Accounting and Finance. I lead the investing group Outfox The Street, where I attempt to uncover potential multibaggers while managing portfolio risk via diversification.
When the new CEO joined the company and started down another path to restructure the business, our investment thesis turned Bearish on Lumen Technologies (NYSE:LUMN). Now, the company is restructuring debt due to the constant slashing of financial targets from constantly restructuring the business. The stock is around $1 likely leading to more pain for the business and investors shouldn't look back at this telecom company in serial decline.
The problem is that the company no longer has any flexibility, and investors were warned of this potential outcome. Lumen has shown for years no ability to grow the business and every new year brings a move to restructure operations and divest low value assets when the only solution that rewards shareholders is to fix the problem units, or at least reduce the losses in these areas and focus on the growing products.
On the Q3'23 earnings call, CEO Kate Johnson even alluded to financial worries leading to customer delays as follows:
- made the difficult decision to reshape and right-size Lumen for growth. We're taking immediate actions, which will result in about 4% fewer people inside the company. This reorg, along with additional optimization initiatives, will generate annualized savings of approximately $300 million. And as you might expect, this is a difficult, but necessary decision given the revenue pressure we felt from the noise in the market regarding our creditor discussions, as well as global macroeconomic pressures.
Lumen still has nearly $20 billion in outstanding debt, with limited free cash flow generation to repay the debt. The company is still watching sales decline sequentially, and the stock isn't investable until this scenario changes.
The actual news of the debt restructuring and the acknowledgement of the revenue pressure from the market noise has sent the stock below $1. At this stock price, Lumen is only likely to face even more pressure from customers questioning whether to work with a company struggling financially so much that the need to restructure debt was required in the first place.
The market cap has dipped below $1 billion, but the enterprise value sits at over $20 billion. The stock might appear interesting at ~4.2x EV/EBITDA targets, but Lumen doesn't have the cash flows to ultimately repay debt and the business continues to drip lower and lower. The stock won't have any value until the telecom can return to strong cash flows, which doesn't appear likely now.
Takeaway
The key investor takeaway is that investors shouldn't look back. Lumen continues the ugly path of trying to cut their way to growth, and it doesn't ever work. Just the combination of the new workforce reduction and the sell of the CDN business will lead to more financial drips in 2024 before even contemplating the potential for lost business due to the negativity surrounding debt restructurings.