🔍Company Deep Dive #1 - $LUMN (CenturyLink Inc)
There is an upside of 48.4% from current stock price for $LUMN (CenturyLink Inc)?
Some say Lumen is one of the fewest undervalued companies out there in this day and age. This telecommunication company has been mostly overlooked by the market because of its lacklustre revenue which had been declining year after year. The company came under the spotlight when it popped to a high of $15 during late Jan due to the historic short squeeze which also sent a few heavily-shorted stocks such as $GME (GameStop Corp New) to the moon. On top of that, Michael Burry of the Big Short fame, who famously started investing in GameStop at $4 per share, also purchased 800,000 and 350,000 shares of lumen in Q3 2020 and Q4 2020 respectively, so could this be the next Michael Burry play?
◆ What is Lumen?
Lumen (formally known as CenturyLink) is one of the largest fiber network owners in the world, with over 450,000 fiber route miles in North America and Europe and today it serves customers in more than 60 countries. Lumen's traditional enterprise and consumer businesses focus on delivering products and services surrounding internet, voice, TV (for residential), cloud and security (for enterprises) etc which mostly utilises its fibre network.
✅ First Glance at Financial Checklist
Our 10 Pillars Financial Analysis had generated a score of 10/30 for Lumen. This score shows that Lumen is by no means a high growth stock, in fact, its financial statements isn’t exactly healthy at first glance which explains why the stock had been beaten down throughout the past few years. However, we will be looking at a few key points which show that the company might be the next successful turnaround story after all.
◆ What's bad?
Taken over by 5G technology - The company's revenue had been hit hard by the growth of 5G technology and cloud computing throughout the past few years which had resulted in a declining trend in the subscribers numbers to its consumer broadband business (Lumen's traditional revenue stream). Ultimately, there is a general conception that Lumen's fibre network will become obsolete due to the tremendous headwind of 5G revolution.
Big acquisition - Lumen made a historic acquisition by buying a company called Level 3 Communications in 2017 for $34 billion which pushed its total debt to an unsustainable level. Level 3 operated a large network Internet and it was one of the largest providers of fiber-optic internet access (based on coverage) in the United States. Not only did this acquisition expanded its fiber network by another 200,000 route miles, it also helped strengthen its financial profile in terms of improving its free cash flow which is evidently still working today. However, the big acquisition also left the investors concerned with its balance sheet and its ability to pay its debt in the future.
Big dividend cut - Lumen had slashed its quarterly dividend by 54%, from $0.54 per share to $0.25 per share in 2019 in order to save much needed cash. This controversial bid had further diminished investor's confidence in the company's financial future outlook.
◆ What's good?
Role in 5G revolution - most investors have missed the fact that in order to deliver widespread nationwide use of 5G technology, telecommunication operators such as $VZ (Verizon) and $T (AT&T Inc) will actually rely on a deep fibre networks infrastructure. Unlike 4G that utilities large cell towers, 5G will rely on extraordinary number of low-cost, low power small cell sites. Instead of investing money and time into building the infrastructure from scratch, the large telecommunication giants will turn to companies like Lumen with a solid business opportunity. In fact, the company is already capitalising on this.
Solid Dividend - With a 7.61% dividend yield , the company is expected to pay $1.1 billion to shareholders this year, however, with a expected free cash flow of $2.8-3 billion this year, the company will be able to easily cover its dividend distribution with free cash flow just like it did consistently in the past. There are also no alarming signs to suggest the company will have to further slashing its dividend in the near future.
Improving debt profile - the company had reduced its debt loads by refinancing a portion of its long term debt ( ~$13 billion) in 2020 using the recent low-rate environment. That means Lumen will have extra cash to pursue growth opportunity in the near future rather being tied down by higher interest payments. Plus in 2020 alone, the company had reduced its net debt by $1.6 billion which shows its commitment in improving its balance sheet.
Huge economic "moat" - globally connected infrastructure and agreements constructed by LUMN would cost "probably hundreds of billions" to replace and 5 to 10 years to implement. The current Enterprise Value of LUMN is approximately $50B indicating LUMN is trading at multiples below replacement value.
Intrinsic value estimate - Using discounted cash flow model along with some valuation assumptions, Dilantha De Silva, the author from Seeking Alpha had worked out the intrinsic value of Lumen to be $19.50, which means that there is an upside of 48.4% from current stock price of $13.14. From the 10 pillars analysis we discussed earlier in the article, we could see that the company’s market cap is currently at 6 times its free cash flow. It might be safe to argue that the company deserve to trade with a market cap up to 10 times its free cash flow considering its potential to benefit significantly from the burgeoning 5G space.
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◆ What are my thoughts?
This a classic value play which I would love to add to the portfolio as a long term investment, despite a bit late to the party. I would have bought some if I had discovered the company before it got short-squeezed early this year. As of now, I would continue to watch the price action closely and hope to get a lower entry point at around $11-12 to allow significant margin of safety below analyst’s price target.
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Best, HaoNing