Lumen Technologies Stock: Approaching Key Point (NYSE:LUMN)

Again in April, I detailed how communication providers firm Lumen Applied sciences (NYSE:LUMN) was going through a serious choice. After eliminating the dividend on account of decreased money movement, the board of administrators had approved a share repurchase plan. With an asset sale anticipated to shut late this yr, a choice would have to be made on what to do with the proceeds. Almost 5 months later, the continued fall within the firm’s share value makes the scenario right here much more fascinating.

Over the previous yr, Lumen shares have misplaced roughly 85% of their worth. Right now in 2022, the inventory was over $9 a share, however just lately the inventory hit a multi-year low of simply $1.35. Traders have been nervous in regards to the deterioration within the firm’s income base together with the potential for vital liabilities on account of lead cable alternative. As a consequence of earlier divestitures in addition to the surge in rates of interest, free money movement technology has all however evaporated.

As of July twenty eighth, there have been simply over 1 billion shares excellent, based on the newest 10-Q filing. On the current low in shares, the corporate’s whole market cap was about $1.36 billion. As a reminder, the board approved a buyback of $1.5 billion by late 2024, of which $200 million had been utilized as of that newest quarterly submitting. With $1.3 billion remaining on the buyback, Lumen shares at their low have been simply six cents away from a key level. At roughly $1.29 a share, the corporate might in concept purchase again each excellent share it has. Because the chart beneath exhibits, even at costs somewhat increased than that, virtually the entire shares which might be excellent may very well be repurchased.

Lumen would not have one of the best stability sheet presently, a part of the rationale why the inventory has declined a lot. On the finish of Q2, the corporate had simply over $400 million in money, however greater than $20 billion in debt. That internet debt place, nevertheless, has been decreased practically in half from the top of 2017, at which level it totaled virtually $38 billion. Administration since then has used a mix of free money movement and asset gross sales to assist the monetary scenario.

As we method the top of Q3, we’re only a quarter or so away from the corporate’s anticipated shut of its newest asset sale. When the corporate had an Investor Event again in June, future steering assumed that $1.5 billion of money from this sale could be used for additional debt paybacks. With rates of interest persevering with to rise, and the Fed doubtlessly trying to hike maybe yet one more time, decreasing the debt pile definitely is one of the best technique for the revenue and money movement statements transferring ahead. As a reminder, steering was for $500 million to $1.3 billion of free money movement to be generated between 2024 and 2027, assuming debt is refinanced at 11% and $1.5 billion from the asset sale was used to pay down debt.

Nevertheless, the maths has definitely modified over the previous 5 months with the inventory falling to the place it’s presently. With the power now to retire principally virtually each excellent share, I feel administration has to no less than talk about the potential for utilizing a few of these coming asset sale proceeds for share repurchases. Do not forget, about 15% of shares excellent have been brief on the finish of August, so chasing away a few of these naysayers may be superb for the share value.

Some buyers could chuckle on the thought of shopping for again the inventory with a lot debt presently. Nevertheless, a fabric enhance within the share value might additionally assist sooner or later. An increase to even $2 or maybe $3 would present extra confidence within the firm, and that might assist with lenders down the road as Lumen works to refinance some money owed down the highway. Additionally, if the inventory have been to skyrocket after a buyback, administration might at all times promote some shares again into the market and use these proceeds for paying down debt, whereas nonetheless decreasing the general share depend within the course of.

Wall Avenue itself stays pretty constructive on the inventory. Whereas the typical goal value has come down with shares during the last yr, the present valuation determine nonetheless represents a doubling from in the present day’s ranges. I proceed to price the inventory a maintain, as a result of the enterprise has not seen outcomes flip simply but, implying the potential for the inventory to go decrease. Nevertheless, that negativity is partially offset by the potential for the buyback, in addition to the potential for outcomes to enhance within the coming years.

Because the inventory has moved decrease, there is also an elevated probability of the corporate being purchased out, whether or not by a bigger participant within the house or perhaps a non-public fairness agency. That is why I am hesitant to suggest shorting the title right here. In truth, because the inventory strikes nearer to $1, I could even elevate my ranking to a purchase, simply due to the elevated possibilities for a buyback or buyout. Getting these sale proceeds in later this yr and even early in 2024 provides the corporate some wanted monetary flexibility.

With Lumen shares hitting extra new lows just lately, the thought of utilizing upcoming asset sale proceeds for a buyback must be on the desk now. We are actually approaching the purpose the place the corporate might retire all of its shares excellent. Whereas debt repayments are good for profitability and money movement in the long run, even a number of hundred million used for the buyback may very well be a robust sign to buyers that might tremendously enhance sentiment within the brief time period. With outcomes anticipated to show round within the coming years, now could be time for administration to sign it believes in Lumen’s future.