In our opinion, Lumen Technologies, Inc (NYSE: LUMN) remains a speculative game, due to massive debts, declining profitability of FCF and continued asset sales, only countered by its attractive dividend yield of 9.48% so far. While the company would probably get by decently for the next few years, we are very concerned about the $10.97 billion debt maturing by fiscal year 2027. Additionally, with slower revenue and profitability growth ahead, we expect further downward pressure on its equity performance over the medium term, further compounded by rising inflation and potential recession.
However, we are cautiously optimistic that LUMN is a viable investment if its dividend payouts are maintained at current yields. Nonetheless, investors should still size their portfolios accordingly, given the potential volatility ahead.
LUMN continues to scale down operations while paying off debts
So far, LUMN has experienced a noticeable deceleration in revenue growth, due to the continued sale of its assets. In the last twelve months (LTM), the company reported revenues of $19.33 billion and gross margins of 56.9%, representing a decline of 10% and 0.5 percentage points from compared to fiscal year 2019 levels, respectively. This also had a direct impact on LUMN’s EBITDA, as it reported EBITDA of $7.75 billion and an EBITDA margin of 40.1% in LTM, representing a decline of 11 .6% and 0.8 percentage points from FY2019 levels, respectively.
Nonetheless, LUMN has also been cautious in its capital management thus far, due to its operating expenses moderating to $6.91 billion in the LTM. It was down -17.6% from FY2019 levels of $8.39 billion, which helped reduce the ratio of its declining revenue to 35.7% at the same time, versus 39.1% at the time.
Consequently, due to the significant decline in operating expenses and interest expenses of LUMN over the past two years, it has recorded a more robust free cash flow (FCF) generation of 3.59 billion dollars and an FCF margin of 18.6% per LTM. This represented a massive improvement of 17.7% and 4.4 percentage points from FY2019 levels, respectively. In the meantime, LUMN’s cash and cash equivalents on its balance sheet remained relatively stable at $0.44 billion in the LTM.
From the graph above, it is evident that LUMN has been steadily divesting its assets thus far, given the reduction in its net assets in PPE to $20.83 billion in the LTM, which represents a down 25% from FY19 levels. The combination of unloading its financial obligations and continued deleveraging efforts had allowed the company to reduce its long-term debt to $28.05 billion in the LTM, indicating a favorable reduction of 12.9% from FY19 levels.
Given the reduction in debt, it made sense that LUMN reported $1.49 billion lower interest expense in the LTM, representing a 26.2% moderation from fiscal year levels. 2019. Nonetheless, we expect the company to continue to invest in capacity going forward, given its capital expenditure forecast of up to $3.4 billion in fiscal 2022 – this which could potentially be accretive to revenue and earnings. We will see.
LUMN debt maturities
Based on the chart above, LUMN has some notable major debt maturities on the horizon, namely $0.94 billion for FY2023. We expect to see projected FCF up to 2.2 billion in fiscal 2022 to fully fund its debt payments and annual dividends in fiscal 2023 without issue. However, the critical issue will be from fiscal year 2024, since we are looking at $1.12 billion in debt maturities then and $4.08 billion for fiscal year 2025. We expect the Apollo’s recent sale helps momentarily, given the large net cash transaction of $7.5 billion.
Nonetheless, due to LUMN’s reduced scale starting in FY2023 and the mind-boggling debt maturity of $10.97 billion in FY2027, we expect the company to potentially raise more long-term capital, as in 2021, to repay its debts. So, unfortunately, the continuation of the debt cycle for this decade due to its reduced profitability in FCF and continued dividend spending of $1.04 billion.
Over the next three years, LUMN is expected to experience an apparent deceleration in revenue and EBITDA growth, given the potential sale of its US and EU assets. However, it is essential to note that the sale will have a negative impact on its EBITDA margins, from 40.9% in fiscal year 2019 to 38.4% in fiscal year 2024.
For fiscal 2022, the consensus also estimates that LUMN will record revenue of $17.54 billion and EBITDA of $6.96 billion, representing a year-over-year decline of 10.8% and 13.1 %, respectively. The decline was primarily attributed to the sale of its assets in 20 U.S. states to Apollo, which still represented an excellent upside financial performance for the year, as the company guided Adj. EBITDA of up to $7.1 billion and FCF of up to $2.2 billion, indicating favorable increases of 5.9% and 22.2% over previous estimates, respectively.
In the meantime, analysts will be closely watching its performance in the second quarter of 2022, with consensus revenue estimates of $4.59 billion and EPS of $0.45, representing a year-over-year decline of -6.68. % and -5.67%, respectively. Nonetheless, those looking for a quick stock market rally should definitely look elsewhere, given the historically mixed performance so far.
LUMN is still a viable dividend stock for new investors
LUMN 10Y stock price and dividend yield
Unfortunately, LUMN has experienced a noticeable downward trend in stock prices over the past ten years. Long-term investors who had bought the stock for the dividends may also be disappointed, as payouts have fallen significantly since peaking at $2.90 annual payout in 2010 to $1 in 2022, despite the reasonably stable dividend yield of 9.48% so far. . However, new investors in LUMN who had entered the lows from 2019 would certainly have benefited, as the stock offers a relatively high dividend yield compared to its peers, such as Verizon (VZ) at 5.8% and AT&T (T) at 6%. .
Additionally, LUMN completed a commendable $1 billion share buyback program in October 2021, returning a lot of value to its long-term investors by reducing the stock count by -7%. Therefore, the stock remains a viable buy for new investors looking for decent dividend yields during the turbulent stock market ahead.
So, is LUMN Stock a buySell or Keep?
LUMN 5Y EV/Revenue and P/E Valuations
LUMN is currently trading at an EV/NTM Revenue of 2.37x and a P/E NTM of 8.1x, in line with its 5-year EV/Revenue average of 2.27x although below its average 5-year P/E of 10.32x. The stock is also trading at $10.55, down 27.2% from its 52-week high at $14.50, closing in on its 52-week low at $9.31.
LUMN 5-year share price
Based on the chart above, it is evident that LUMN has experienced adverse sideways price action over the past few years. Thus, leading to the stock’s sell rating on consensus estimates, with a price target of $10.67 and a minimum upside of 1.14% – barring an unlikely positive catalyst for the rally.
Still, we’re not overly optimistic given the lackluster performance of the sector so far – the SPDR fund in the communications services sector (XLC) has fallen -28.42% year-to-date, with Frontier Communications (NASDAQ:FYBR) and Consolidated Communications (NASDAQ:CNSL). ) also dropping -12.2% and -15.80% at the same time, respectively. AT&T and Verizon have fared no better with declines of -4.17% and -15.24% since the start of the year, respectively.
Given the mixed signals ahead, we would not recommend anyone to add LUMN at this level as the company is also expected to release its FQ2’22 results soon. This would provide us with more information on the performance of the company since the beginning of the year. However, we expect a pleasant surprise in the medium term, given the strength of its long-term contracts.
Therefore, we rate the LUMN stock as a Hold for now.