Lumen: Handicapping The Near Term Prospects (NYSE:LUMN)

Lumen (NYSE:LUMN) indicated it would be reporting its financial results on February 7 after the market closes. We see this as the new CEO’s first opportunity to speak with shareholders, explain the company and outline her agenda for moving forward. Accordingly, we expect stock price action will depend on her approach, revelations of facts, and the rapport management builds with investors.

Game Theory In Lumen’s C suite

This will be new CEO Kate Johnson’s first quarterly report. We see her as having three choices.

1. Kitchen sink: Write off as much of the cost structure to put bad stuff in the rearview and set up for a more profitable and growing future.
2. Come Out Swinging: Create a new baseline and explain to investors what to expect.
3. Define and Defer: Present her view of Q4 results for context and outline a strategic framework. (A comprehensive strategic framework might be shocking to former L3 and CenturyLink employees).

Baseline assumptions for all cases.

• Lumen has not used any of its $1.5B share buyback authorization.
• Kate Johnson prefers not to be burdened with a dividend requirement.
• The board and Kate Johnson have not decided if Chris Stansbury is a keeper.

These predication are those of a blind man trying to define an elephant.

Kitchen sink: 30% likelihood

I would say this is possible and probably is the best answer for investors. It is doubtful that Kate Johnson has been in office long enough to make the required choices. CFO, Chris Stansbury, has likely been around long enough to have a solid understanding of good and bad assets. If Kate Johnson and Chris Stansbury have become partners, the likelihood of this scenario happening increases and argues well for Lumen’s future.

This issues is that the kitchen sink strategy reflects poorly on the board and they may prevent this action. This would be bad for the stock in both the short and long term

Come out swinging: 20% chance.

In this scenario, Kate Johnson would present herself as a “master of the universe” by making bold financial forecasts, driving any write-offs and boasting of a new organization. We think she is too smart to do this. Depending on the achievability of near-term goals, the stock could go in either direction.

Define and Defer: 50% possibility.

I think this is most possible as Define and Defer seems most consistent with Lumen’s history and culture. In this scenario, expect new CEO Kate Johnson to provide a more extensive version of her January 5 presentation at Citigroup’s Media and Entertainment conference and then promise a more detailed update with a future quarterly report or analyst day. At Citigroup, she outlined ideas about leveraging Lumen’s technology but promised very little. It would be better if she could put more teeth into her explanations of how they will leverage edge, security, and the virtualization portfolio acquired with the TW Telecom acquisition.

My best guess is that the stock might go up if she has a good pitch and appears well-aligned with her CFO, Chris Stansbury. If not, expect little or no action.

LUMEN Stock By The Numbers And In The Rearview

LUMEN has been a far more controversial stock than it should have been. Formed at the end of 2017 from the merger of Century Link and Level 3, the company missed management’s projections and has persistently disappointed investors with revenue declines, unexpected business dispositions, and what could be perceived by some as a generally antagonistic attitude toward shareholders.

It has also sold several business operations – South American, European, and 20 states in the southeastern US. Further frustrating investors is that Lumen has not published discrete financial reports for the sold entities. Strategically we can see clear benefits to the South American and 20 Southeastern state dispositions. The case for selling part of the European operations seems less clear.

The South American and 20 US State operations are expected to bring in $8.7B in proceeds. So far, the company has elected to pay down $2.7 B of the $25.2B in debt it reported at the end of the third quarter. Lumen expects to receive $1.8B in proceeds from the European sale.

Possibly more disappointing to many investors, Lumen reduced its dividend at the beginning of 2019 and ended it last quarter (Q3/2022.) In fairness, when Lumen eliminated the dividend, it also announced that it had authorized a $1.5B share repurchase plan. This is roughly 50% more than the annual dividend commitment. It also announced its CEO was retiring and being replaced by former Microsoft enterprise executive Kate Johnson. Since ending the dividend and not disclosing the financials of disposed businesses, we’ve felt Lumen’s stock is in no man’s land.

We have immense respect for the analysts on whose estimates the following table is based.

Lumen Technologies Analyst Estimates
	2022	2023	2024
EPS (Mean)	$1.35	$0.74	$0.74
EPS GAAP (Mean)	$1.68	$0.74	$0.75
Revenue (Mean) $B	$17.47	$14.77	$14.37
EBITDA (Mean) $B	$6.83	$5.33	$5.26
EBITDA Margin (Mean)	39.1%	36.1%	36.6%
Source: Y-Charts

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Is the stock cheap? For now, it is hard to tell. We do not know the new CEO’s agenda; we have not seen financials from the Euro disposition. If the information presented on February 7, and that is a big if, is consistent with expectations, then the stock may be seriously undervalued when compared to other telecommunication companies. This valuation table from Y-Charts seems to argue that Lumen may be cheap.

February 7 is likely to be a big day for Lumen stock. Financials will be clarified. New CEO, Kate Johnson’s agenda may be revealed and we expect CFO Chris Stansbury will present considerable new information to answer many questions. For now, we see the stock as being in no-man’s land.

Lumen Stock: Popular Valuation Metrics
Company Name	Price to Earnings (TTM)	EV to Revenue	EV to EBITDA	EV to Free Cashflow
Lumen	2.6	1.644	4.001	12.33
AT&T	6.8	2.195	12.75	22.87
Verizon	8.1	2.339	6.534	30.77
Comcast	33	2.190	9.849	21.03
T-Mobile	120	3.114	12.75	NA
Source: Y-Charts

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