Lumen Earnings: Mostly Poor Results, but Recent Contract Wins Suggest an Upturn

Morningstar Key Stats for Lumen Technologies

• Morningstar Rating: 3 stars
• Fair Value Estimate: $5.00
• Economic Moat: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Lumen Technologies Earnings

Lumen’s LUMN second quarter was consistent with recent trends, with sales continuing to decline at a mid-single-digit rate organically and margins remaining depressed. However, the firm’s recent announcement that it will receive $5 billion to build private networks to help advance hyperscalers’ artificial intelligence needs, including a recently announced deal with Microsoft, has reduced the liquidity risk that we believe has hampered the stock. We are reducing our Morningstar Uncertainty Rating to Very High, from Extreme, and we’re slightly lowering the discount rate we use for Lumen’s valuation to reflect the lower risk.

The reduction in our discount rate along with operating benefits we expect from the recent deals result in our fair value estimate rising to $5 from $1.50. We expect the stock to remain very volatile as equity continues to make up a small portion of Lumen’s total enterprise value. The 200%-plus rise in our fair value estimate for the stock corresponds with only a 15% increase in enterprise value. We could see significantly more upside to the stock if Lumen extends its run of recent deals, but slight missteps could cause an equally dramatic decline, all while the enterprise value remains somewhat stable.

The recent deals shouldn’t materially affect revenue or EBITDA in the next few years, but they will result in a significant upfront cash infusion. Lumen should then recognize the sales and profits over terms that could be 20 years or longer, meaning these deals alone shouldn’t have a huge impact on annual results. However, Lumen has another $7 billion of similar deals in its pipeline and management says the near-term cash infusion gives it the capability to take other costs out of its business.

We’ve long thought that Lumen didn’t need to show any revenue or profit growth to look like a bargain. The question was whether it would maintain sufficient liquidity to survive and we’re more confident of that today than we were before these deals materialized.