One Blue-Chip Stock on the Investors’ Radar - LUMN

May 19, 2021 12:00 AM PDT | Team Kalkine
One Blue-Chip Stock on the Investors’ Radar - LUMN

Lumen Technologies, Inc.

LUMN Details

Lumen Technologies, Inc. (NYSE: LUMN) provides a wide range of telecommunication solutions and services to global businesses and customers. The company has around 450,000 route miles of fiber optic cable network across Europe, Asia, and Latin America. LUMN ranks among the largest provider of communication services to US and international customers. As of May 18, 2021, the company’s market capitalization stood at USD 16.08 billion. Since the internal reorganization in January 2021, the company operates in the following two segments:

  1. Business: This segment provides products and services to enterprise and commercial customers under four sales channels, i.e., International and Global Accounts (IGAM), Large Enterprise, Mid-Market Enterprise, and Wholesale segment. The segment comprised 71.5% of the company’s topline in Q1FY21.
  2. Mass Markets: This segment provides products and services to consumers and small business enterprises. As of March 31, 2021, the division serves 4.7 million broadband subscribers.

New Financial reporting (Source: Earnings Presentation, February 10, 2021)

U.S. Navy JAG Connectivity Contract Award: On May 11, 2021, the company announced that it had secured the U.S. Navy Judge Advocate General (JAG) Corps contract. Under this contract, the company will provide its connectivity solution to 20 Navy Jag Sites in the U.S. via software-defined wide-area networking (SD-WAN). The contract has an initial term of one year with 11 one-year options making it a 12-year task order. Lumen will provide the platform for IT modernization U.S. Navy JAG by supplying adaptive networking, edge cloud, and connected security through its largely connected fiber network.

Robust Q1FY21 Results: The company reported a slight decline of 3.80% in total revenue to USD 5,029 million in Q1FY21 (ending March 31, 2021) compared to USD 5,228 million in Q1FY20 (ending March 31, 2020). However, the company’s operating income increased from USD 980 million in Q1FY20 to USD 987 million in Q1FY21, primarily driven by a decrease in operating expenses. The business segment contributed 71.48%, while the Mass Market segment contributes 28.51% of the net revenues in Q1FY21. The company reported a sharp increase of 51.27% in net income to USD 475 million in Q1FY21 compared to that of USD 314 million in Q1FY20. The company is continuously paying down its long-term debts while maintaining its dividend distribution (USD 0.25 per share).

Key Risks: The company faces increasingly intense competition from various players in the industry. The increase in competition has lowered the market prices for many of the company’s products and services in past years. The continual decrease in market prices could affect the company’s operational and financial situation in the future. Also, the leveraged balance sheet is a cause for concern, though the company has been improving it continuously.

Outlook: For FY21, the company is expecting its adjusted EBITDA to be in the range of USD 8.4 billion to USD 8.6 billion. Free Cash Flow is projected to be in the range of USD 2.8 billion to USD 3.0 billion. The company is also forecasting to spend USD 1.10 billion as dividends in FY21.

FY21 Guidance (Source: Earnings Presentation, May 05, 2021)

Valuation Methodology: EV / EBITDA Multiple Based Relative Valuation

(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

  • % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

LUMN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: LUMN has slightly increased by 14.71% in the past one month and is currently leaning towards the higher band of the 52-week range of USD 8.51 to USD 16.60. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 17.17. We believe the company’s fiber network constitutes a unique asset that provides a large competitive advantage. Considering the company’s market dominance, dividend yield, and continuous improvement in long-term debt profile, we recommend a “BUY” rating on the stock at the closing price of USD 14.58, up by 0.21% as of May 18, 2021.