Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Lumen Technologies Inc (LUMN, Financial). The stock, which is currently priced at 1.54, recorded a gain of 6.21% in a day and a 3-month decrease of 35.84%. The stock's fair valuation is $8.8, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Investigating Lumen Technologies: A Hidden Gem or a Value Trap?
Despite its seemingly attractive valuation, certain risk factors associated with Lumen Technologies (LUMN, Financial) should not be ignored. These risks are primarily reflected through its low Altman Z-score of -0.95, and the company's revenues and earnings have been on a downward trend over the past five years. These indicators suggest that Lumen Technologies, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-Score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot: Lumen Technologies
With 450,000 route miles of fiber, including over 35,000 route miles of subsea fiber connecting Europe, Asia, and Latin America, Lumen Technologies is one of the United States' largest telecommunications carriers serving global enterprises. Its merger with Level 3 in 2017 and divestiture of much of its incumbent local exchange carrier, or ILEC, business in 2022 has shifted the company's operations away from its legacy consumer business and toward enterprises (now nearly 80% of revenue). Lumen offers businesses a full menu of communications services, providing colocation and data center services, data transportation, and end-user phone and internet service. On the consumer side, Lumen provides broadband and phone service across 37 states, where it has 4.5 million broadband customers.
Lumen Technologies's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Lumen Technologies's Altman Z-score reveals Lumen Technologies's financial health may be weak, suggesting possible financial distress.
The Bearish Signs: Declining Revenues and Earnings
One of the telltale indicators of a company's potential trouble is a sustained decline in revenues. In the case of Lumen Technologies, both the revenue per share (evident from the last five years' TTM data: 2019: 20.12; 2020: 19.55; 2021: 18.61; 2022: 18.49; 2023: 15.66; ) and the 5-year revenue growth rate (-7.9%) have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Lumen Technologies's products, or escalating competition in its market sector. Either scenario can pose serious risks to the company's future performance, warranting a thorough analysis by investors.
The Red Flag: Sluggish Earnings Growth
Despite its low price-to-fair-value ratio, Lumen Technologies's falling revenues and earnings cast a long shadow over its investment attractiveness. A low price relative to intrinsic value can indeed suggest an investment opportunity, but only if the company's fundamentals are sound or improving. In Lumen's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations.
Without a clear turnaround strategy, there's a risk that the company's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity.
Conclusion: Navigating the Risks of a Potential Value Trap
Given the above analysis, it is clear that Lumen Technologies exhibits several signs of a potential value trap. Its low Altman Z-Score, declining revenues, and earnings suggest that despite its seemingly attractive valuation, the company may be facing significant challenges that could impact its future performance. Therefore, investors should exercise caution and conduct thorough due diligence before making an investment decision.
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