2023-11-10 09:00:41 ET
Summary
- Lumen Technologies has restructured its long-term debt, increasing its interest expense and taking on more financing.
- The company has reached an agreement with its creditors to address its outstanding debt, providing a clear path to 2029.
- Lumen must cut its CapEx spending, and investors must now question whether the company's turnaround plan could work out accordingly.
- Investors' confidence in the company's execution has plunged, which saw LUMN take out lower lows this month. Its recent recovery from those lows isn't expected to be sustained.
- I argue why Lumen holders should consider letting go of their shares and call it a day. Otherwise, they need to brace for more pain.
Keen investors should recall that I downgraded Lumen Technologies, Inc. (LUMN) stock in my previous update, urging investors to avoid this "value trap." Lumen's third-quarter or FQ3 earnings release in late October confirmed my worst fears as the company restructured its long-term debt. As such, while it helped to extend their maturities, Lumen also took on more financing and thus increased its interest expense.
Accordingly, Lumen concluded an agreement with its creditors " holding over $7 billion of the company's outstanding debt." The company highlighted that it now has "ample time for executing its turnaround," as the agreement provided a "clear path to 2029." In addition, Lumen also took on an additional $1.2B in new financing, which isn't constructive, given the current high-interest rate conditions.
As a result of the increased interest burden, Lumen needs to cut its CapEx spending to the tune of "$200M to $300M over the next few years compared to the projections presented at the Analyst Day." Lumen had faced substantial difficulty rejuvenating its revenue growth amid a decline in its legacy revenue segments even before the recent arrangement. As such, with a necessary cut in CapEx spend, as Lumen restructures its debt, investors must ask whether the company's turnaround plan could still work out.
Lumen guided FY23 CapEx spending between $2.9B and $3.1B for a midpoint metric of about $3B. Analysts expect the company to post revenue of $14.51B for the full year, representing an estimated CapEx margin of about 21%.
Analysts estimates for CapEx over the next two years have been revised downward, given the company's updated outlook. Accordingly, the company is expected to incur CapEx spending of about $2.77B and $2.75B in 2024 and 2025, respectively. As such, the updated projections are pretty much in line with Lumen's outlook.
However, the critical question is whether Lumen's revised CapEx spend could support its turnaround thesis. Because if it doesn't, it could weigh on the company's profitability recovery over the next two years. Lumen expects an interest expense outlook of between $1.1B and $1.2B this year against an adjusted EBITDA guidance of $4.7B at the midpoint.
Analysts have likely downgraded their optimism on the company's near- and medium-term prospects, seeing a significant increase in the risks on its balance sheet health.
However, by the time you read my latest update, the market has already reacted to these challenges, pricing it in quickly. Accordingly, LUMN fell to its November low at the $0.79 level before buyers returned aggressively.
Lumen CEO and CFO also made insider purchases, as they attempted to snap up LUMN shares cheaply, which could have also lifted buying sentiments.
However, investors shouldn't take that as an all-clear sign that LUMN's price action could have hit its long-term bottom and is poised for a turnaround.
LUMN remains mired in a downtrend bias, notwithstanding the recent recovery. I've also not gleaned price action signals that buyers are willing to hold on to their shares from here, suggesting caution is necessary.
Takeaway
Lumen's turnaround strategy is increasingly at risk as the company faces the dilemma of reducing its debt burden by diverting much-needed CapEx spending to restore its stalled revenue growth.
LUMN's price action suggests sellers have been right all this while, as LUMN lost more than 80% over the past year on a total return basis.
With LUMN taking out a lower low this month, the stage for a further drop after sellers digest the recent dip-buying is set. I believe the market is signaling little confidence in its turnaround plan, and it could be more painful if management's execution remains poor amid harsh macroeconomic conditions and high interest rates.
It's time to consider selling at the low and move on.
Rating: Downgraded to Sell.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Lumen: Just Let Go And Don't Look Back (Rating Downgrade)