Why Lumen Applied sciences Inventory Plummeted (Once more) in February

What occurred

Community options supplier Lumen Applied sciences (LUMN 4.10%) had a horrible February, regardless of an earnings report early within the month that appeared to hit all the precise notes. The inventory fell 35.2% final month, according to data from S&P Global Market Intelligence.

So what

At first look, the fourth-quarter report appeared fairly good. The analyst consensus had referred to as for earnings of roughly $0.19 per share on income close to $3.78 billion. As an alternative, the corporate noticed $0.43 of bottom-line earnings per share and a gross sales haul of $3.80 billion.

However traders shrugged off the better-than-decent ends in mild of gloomy steering and downbeat management comments. Adjusted earnings earlier than curiosity, tax, depreciation, and amortization (EBITDA) are anticipated to drop roughly 30% subsequent 12 months, whereas free cash flow ought to land close to the break-even level. Lumen’s inventory closed 20.8% decrease that day and continued to development downward via the remainder of February.

Now what

Plunging share costs are nothing new for Lumen traders. The corporate previously often known as CenturyLink, Qwest Communications, and Degree 3 Communications (amongst different predecessors) has been in full-fledged turnaround mode for almost a full decade now.

Gross sales are down by 4% during the last 10 years, regardless of a top-line adrenaline shot from the Degree 3 acquisition. Free money circulation is down by 42% over the identical interval. Lumen’s traders absorbed a 91% destructive return, or a milder 80% haircut when accounting for dividends and dividend reinvestments alongside the way in which.

Lumen crossed out its dividend coverage final November. The dividend yield, which topped out at greater than 17% final November, has been lowered to zero to be able to preserve money for different functions.

Lumen is below new administration led by ex-Microsoft and Basic Electrical govt Kate Johnson. She is making an attempt to reform the company tradition and kick-start its stalled engines of innovation and progress. I want her the very best of luck, however the turnaround will not be fast and simple.

In the meantime, the inventory is priced as if Lumen’s enterprise was already midway off the cliff. You’ll be able to wager on this turnaround effort on the rock-bottom valuation of three.6 occasions free money circulation, 0.2 occasions gross sales, and 0.3 occasions book value.

In different phrases, the market tenor means that Lumen’s shareholders could be a lot better off if the corporate simply liquidated its belongings to fund one final mega-dividend as an alternative of really operating the enterprise.