Lumen Technologies is a telecommunications company that provides a wide range of communication and network services. The company offers several services such as voice, data, and managed services to business and residential customers, leveraging its extensive fiber network and infrastructure.
Despite its significant network assets, Lumen has faced challenges in its growth strategy and financial performance.
DCF Analysis Indicates Upside Potential
An updated DCF analysis, based on the lower end of management guidance, a 12% discount rate, and conservative growth assumptions, yields a price target of $1.22, representing a 17% upside from current pricing.
Significant Asset Value
Beyond current operations, Lumen holds substantial real assets that exceed its market cap. As of Q1 2024, Lumen’s Property, Plant, and Equipment (PPE), net of depreciation, was valued at $19.9 billion.
The land, fiber, conduit, plant, central office, and network electronics represent 77% of these assets. With telecom M&A premiums ranging between 30% and 60%, a conservative 20% premium suggests significant undervaluation.
Breakdown of PPE
- Land, fiber, conduit, plant, central office, and network electronics: 77% of assets
- Accounting for cash and debt, the rough value of assets exceeds $2 billion.
Lumen’s Large Subscriber Base
Lumen also has a large subscriber base for fiber, with Raymond James valuing 5G/fiber telecom customers at approximately $520 per customer. A midpoint valuation of $400 per customer suggests a value of $381 million for fiber subscribers alone.
Insider Trading and Valuation Multiples
Insider trading activity has increased significantly, with most transactions being purchases. President Kathleen Johnson notably increased her holdings by 9% with a $960 thousand purchase. Valuation multiples are favorable, with key sales and cash flow ratios well below sector averages, further indicating potential upside.
Downside Risks
The primary risks include a lack of buyers for key assets and a potential guidance miss for 2024. A guidance miss could negatively impact investor confidence and push Lumen’s stock price below $1 from its current $1.06 level, although delisting is unlikely. A reverse stock split is more probable scenario.
Lumen Technologies Warrants a Closer Look
Lumen Technologies is struggling but retains significant core value, particularly in its assets. A DCF analysis on the low end of management guidance presents a price target with 17% upside. The asset portfolio, net of debt, is worth nearly double the current market cap.
Insiders are making substantial stock purchases, and valuation multiples are compelling. Despite the challenges, the potential for a rise in share price is supported by a comfortable margin of safety.
Given the potential for strategic asset sales and a strong asset base, Lumen Technologies presents a compelling case for investment evaluation.
Lumen Technologies Has a Solid Base for Future Growth
The company’s substantial undervaluation relative to its asset base and the potential for operational improvements provides a solid foundation for future growth.
While risks remain, the overall outlook suggests that Lumen Technologies could see significant value realization in the near to mid-term.
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