Can Lumen Stock Recover To $10? No, But It’s Still A Buy (NYSE:LUMN)

Elevator Pitch

I rate Lumen Technologies, Inc.’s (NYSE:LUMN) stock as a Buy.

My earlier October 4, 2022 write-up for Lumen Technologies touched on the company’s new CEO and CFO appointments, and its shareholder capital return expectations. With this latest article, I assess the chances of a meaningful share price recovery happening for LUMN in the near future.

I don’t see LUMN’s stock price surging to as high as $10 in the current year. But my target price of $7.52 for Lumen Technologies suggests that a meaningful recovery in its share price in 2023 is pretty achievable. Therefore, I upgrade my investment rating for Lumen from a Hold previously to a Buy now.

Why Did Lumen Stock Drop So Much In 2022?

LUMN’s share price plunged by -58.9% last year as indicated in the chart below.

Lumen Technologies’ 2022 Stock Price Performance

It is important to note that Lumen Technologies’ share price performance was tracking the broader market very closely for the first eight months of 2022. LUMN only began underperforming the S&P 500 in a significant manner after September 2022. Investor worries about the risk of Lumen Technologies cutting its future dividends started growing in the later part of the prior year. I also emphasized in my prior October 4, 2022 article that “LUMN’s shares might sink, if Lumen Technologies’ future dividends were reduced significantly.”

Investors’ worst fears were confirmed at the beginning of November 2022. LUMN issued its Q3 2022 earnings press release on November 2, highlighting that it “eliminated the company’s annual dividend.” At its third quarter results briefing on the same day, Lumen Technologies also mentioned that the excess capital generated from the dividend omission will be allocated to its “growth plans”, its “balance sheet”, and “share repurchases.” On November 3, 2022 alone (the day after LUMN’s dividend disclosure), Lumen Technologies’ stock price fell by -17.7%.

In a nutshell, the market’s expectations regarding LUMN’s dividends have had a significant impact on Lumen Technologies’ stock price performance in 2022. Initially, investors were concerned that LUMN might lower its dividend payouts. Subsequently, they became disappointed as Lumen Technologies decided to completely do away with dividends.

LUMN Stock Key Metrics

The key metrics for Lumen Technologies are its below-expectations earnings, and the changes in the consensus financial forecasts for the company.

LUMN’s actual Q3 2022 and Q2 2022 non-GAAP adjusted earnings per share or EPS came in -60.2% and -23.2%, respectively lower than the Wall Street analysts’ consensus bottom line estimates. The company’s non-GAAP EPS decreased by -27.1% YoY and -71.4% YoY in Q2 2022 and Q3 2022, respectively. Prior to the second quarter of 2022, Lumen Technologies was able to register positive bottom line growth in YoY terms for nine quarters running between Q1 2020 and Q1 2022.

The company’s financial performance in the recent two quarters were poor, and the near-term outlook for LUMN isn’t promising either.

The sell-side’s consensus fiscal 2023 bottom line projection for Lumen Technologies was lowered by -21.9% in the last three months. This implies that the market expects LUMN’s normalized EPS to fall by -43.7% to $0.75 for full-year FY 2023.

LUMN acknowledged at Citi’s (C) Communications, Media & Entertainment Conference on January 5, 2023 that it has “some businesses that are in decline with commoditization happening, and some legacy technologies.” This largely explains why Lumen Technologies’ recent financial results were bad and expectations of its future performance are low.

Is Lumen Undervalued Now?

I am of the view that Lumen Technologies’ shares are undervalued now.

My target price for LUMN is $7.52, which implies a +25% upside as compared to the company’s last done stock price of $6.04 as of January 12, 2023. I arrive at Lumen Technologies’ $7.52 target price by applying an EV/EBITDA multiple of 6.2 times to its consensus fiscal 2023 EBITDA of $5,350 million.

According to valuation data sourced from S&P Capital IQ, listed telecommunications and cable businesses are currently valued by the market at between 6.4 times and 10.1 times consensus forward next twelve months’ EV/EBITDA. As such, I believe that my target EV/EBITDA multiple of 6.2 times is reasonable.

What Are Price Targets For Lumen?

There is a pretty wide range of sell-side price targets for Lumen Technologies.

The most optimistic Wall Street analyst sees LUMN’s share price rising by +132% to $14, while the most pessimistic of the lot expects Lumen Technologies’ stock price to decline by -17% to $5.

In a nutshell, the risk-reward for Lumen Technologies is favorable. The potential upside for LUMN in the best case scenario is substantial (+132%), while its potential downside in the worst case scenario is relatively modest (-17%).

Can Lumen Stock Recover to $10 in 2023?

Year-to-date, Lumen’s stock price rose by +12.5% to close at $6.04 as of January 12, 2023. Notably, LUMN’s shares have outperformed the broader market in 2023 thus far, as the S&P 500 only went up by +4.2% in the same time frame.

I expect LUMN’s positive share price momentum in the beginning of the year to be sustained. While it will be a stretch to see Lumen Technologies’ shares returning to $10 or above (where it traded at prior to September 2022) this year, a rebound in LUMN’s stock price to $7 and higher is realistic. As I highlighted in an earlier section of the article, I think Lumen Technologies’ share price has the potential to go up to as high as $7.52 (my price target).

LUMN has made some painful decisions in recent months. Apart from omitting its dividend, Lumen Technologies has also restructured its business portfolio by selling non-core businesses. Specifically, Lumen Technologies completed the sale of businesses in Latin America and EMEA (Europe, Middle East and Africa) in August 2022 and November 2022, respectively. LUMN also divested its “ILEC (incumbent local exchange carrier) business in 20 states”, as revealed in an October 3, 2022 media release.

In my view, Lumen Technologies’ dividend omission and asset sales increase the odds of a successful business turnaround for the company in time to come. LUMN is now in a better position to place a stronger emphasis on its core businesses such as Enterprise and key client segments like large corporates. At the same time, the divestments and removal of dividends also generate excess capital that can be allocated to investments supporting future growth.

Is LUMN Stock A Buy, Sell, or Hold?

LUMN’s stock is a Buy. I am of the opinion that Lumen Technologies’ stock price should be able to rebound strongly to $7 or above in 2023, which justifies a Buy rating.