Lumen stock follows record annual decline with another steep drop this year

Lumen Technologies Inc. isn’t exactly in the top company among the S&P 500 laggards this year.

Of the eight worst performing names in the index so far in 2023, seven are battered bank stocks, including SVB Financial Group SIVB,
and Signature Bank SBNY,
whose correspondent banks collapsed and were taken over by the government. SVB and Signature shares are stopped and must be started from the S&P 500 SPX,
after today.

See more : Bunge to replace Signature Bank in S&P 500, stocks rally

The only non-bank name among the bottom eight is Lumen LUMN,
the telecommunications company formerly known as CenturyLink, which continues to see its legacy wireline business struggling. The stock is down around 50% so far this year, having fallen 58% in 2022 to mark its worst annual performance on record.

Shares of Lumen fell 20.8% during the session after the company’s latest earnings report, which brought a bullish outlook. Shares closed at $3.95 after that report in early February, and they have continued to fall since then. They ended the last two sessions at $2.60, their lowest closing level since Jan. 15, 1988, according to Dow Jones Market Data.

Half of the analysts who cover Lumen’s stock believe it’s a sell-off – a rarity among S&P 500 constituents. Within the index, only Principal Financial Group PFG,
has a higher share of sell odds, at 53%, while T. Rowe Price Group Inc. TROW,
corresponds to Lumen at 50%. Both of these investment managers are struggling amid outflows from mutual funds to exchange-traded funds.

At $2.6 billion, Lumen’s valuation is the lowest among S&P 500 constituents. The company scrapped its dividend in November while allowing a buyback program of up to $1.5 billion. About a decade ago, when its corporate name was still CenturyLink, the company made a similar move to cut the dividend while announcing a stock buyback authorization.

The recent drop in Lumen shares has one bearish analyst wondering if the sentiment is too negative. MoffettNathanson analyst Nick Del Deo noted in a note in early March that “everything has a price”, adding that “the sharp deterioration in share price and market expectations for the company have made us ponder: an upgrade, even of a tactical nature, to be appropriate?”

At the time, shares of Lumen were trading at $3.23 and Del Deo decided not to upgrade. Lumen “may have ‘cooked’ its outlook for 2023,” he wrote, but even if the company were to beat its earnings expectations for the year, “the market will increasingly focus on other challenges”, including revenue pressures, competitive developments and tight cash flow. -stream image.

Morgan Stanley’s Simon Flannery also weighed in on the continued decline in Lumen shares, cutting his price target on the name to $2.50 from $6 in a Monday note to clients.

“The market capitalization of Lumen [circa $3 billion] is overshadowed by a pile of debt over $20 [billion],” he wrote. “We also saw a dramatic sell-off in Lumen’s debt, with several rating agency downgrades.”

Like Del Deo, Flannery noted that the “recent correction raises the question of whether the selloff is overdone or more to do,” and he landed at the same conclusion, reiterating his bearish note.

“We maintain our underweight rating as we continue to see downside risks and do not expect clear evidence of near-term performance inflection,” Flannery concluded. “That said, it’s possible the stock could perform better if it becomes clear that the outlook is too conservative or if the company can find other significant asset monetization opportunities.”

Lumen’s near-term liquidity profile appears solid, according to Flannery, and the company should benefit financially in 2024 from the sale of its Europe, Middle East and North Africa businesses.

But “credit markets are currently pricing a much more negative outcome than equity markets,” Flannery wrote, adding that he expects increased risk to the business over the medium term. Given Lumen’s capital structure in the current environment, the company may have to avoid certain investments, which could harm its competitive position.

A bright spot, he noted, is that new Lumen management “plans to stabilize revenue and EBITDA [earnings before interest, taxes, depreciation and amortization] emerge from 2024 with targeted growth thereafter” and is expected to share more information about its plans at an Investor Day in June.

“On the other hand, Lumen and many of its peers have for many years been under continued pressure on top line and bottom line, reflecting secular and competitive pressures, with little visibility of a return to growth,” said writes Flannery. “Lumen’s corporate businesses continue to experience single-digit revenue declines, which may accelerate in the near term as the company exits less profitable lines of business.”

In addition, a recession could put the company’s business customers under pressure and force them to cut back on information technology spending, he noted.

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