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Sydnee Gatewood
Sydnee Gatewood
Articles (3566) 

Mason Hawkins' Southeastern Strengthens Connection With Lumen Technologies

Longleaf manager adds to stake in telecom company formerly known as CenturyLink

Southeastern Asset Management, the investment firm founded by Mason Hawkins (Trades, Portfolio) in 1975, disclosed it increased its stake in Lumen Technologies Inc. (NYSE:LUMN) by 3.66% last week.

To achieve long-term capital growth, the Memphis, Tennessee-based firm, which manages the Longleaf Partners Funds, invests in a concentrated number of undervalued companies that have strong balance sheets and good management teams.

According to GuruFocus Real-Time Picks, a Premium feature, the firm invested in 2.3 million shares of the Monroe, Louisiana-based telecommunications company on Dec. 3, impacting the equity portfolio by 0.62%. The stock traded for an average price of $10.51 per share on the day of the transaction.

The firm now holds a total of 65.2 million shares, which represent 17.56% of the equity portfolio and is its largest holding as of the end of the third quarter. GuruFocus data shows Southeastern has lost an estimated 28.51% on the investment since establishing the position in the fourth quarter of 2017.

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Formerly known as CenturyLink, the company, which changed its name in September, offers communications and network services as well as security, cloud solutions, voice and managed services. It has an $11.59 billion market cap; its shares were trading around $10.56 on Monday with a price-earnings ratio of 8.87, a price-book ratio of 0.85 and a price-sales ratio of 0.52.

The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.

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The GuruFocus valuation rank of 10 out of 10 also supports undervaluation, but the GF Value chart leans more toward the stock being fairly valued.

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Lumen reported its third-quarter results on Nov. 4, posting adjusted earnings of 40 cents per share on $5.17 billion in revenue, which was a slight decrease from the prior-year period.

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In a statement, President and CEO Jeff Storey said that in addition to the strong financial results, he is "encouraged by the opportunities we are seeing as we repositioned the company as Lumen."

"The Lumen platform leverages our rich fiber infrastructure assets to deliver industry-leading services to customers implementing the technologies that power the fourth Industrial Revolution," he added. "As we invest in addressable markets that are growing and in our own digital transformation, we believe our revenue trajectory will continue to improve over the long term."

The company also announced a $1 billion offering of 4.5% Senior Notes due in 2029 on Nov. 23, the proceeds of which would be used to redeem an aggregated of $775 million worth of outstanding 6.125% Notes due in 2053. The offering was completed on Nov. 27.

GuruFocus rated Lumen's financial strength 3 out of 10. In addition to poor interest coverage, the company is weighed down by a low Altman Z-Score of 0.5 that warns of potential bankruptcy risk if it does not improve its liquidity. The return on invested capital is also being eclipsed by the weighted average cost of capital, indicating struggles with profitability and value creation.

The company's profitability fared a bit better, scoring a 5 out of 10 rating on the back of an expanding operating margin and returns that outperform at least half of its competitors. Lumen also has a moderate Piotroski F-Score of 6, which indicates business conditions are stable. Despite recording a decline in revenue per share over the last five years, it has a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.

With 5.95% of outstanding shares, Hawkins' firm is by far Lumen's largest guru shareholder. Pioneer Investments (Trades, Portfolio), Prem Watsa (Trades, Portfolio), Philippe Laffont (Trades, Portfolio), Richard Snow (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), John Hussman (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio) also own the stock.

Portfolio composition and performance

Southeastern's $3.88 billion equity portfolio, which was made up of 29 stocks as of Sept. 30, is largely invested in the communication services and consumer cyclical sectors.

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Other stocks the firm owns in the communications space include Liberty Braves Group (NASDAQ:BATRK), Baidu Inc. (NASDAQ:BIDU), Comcast Corp. (NASDAQ:CMCSA), Liberty Formula One Group (NASDAQ:FWONA) (NASDAQ:FWONK), WindeOpenWest Inc. (NYSE:WOW), GCI Liberty Inc. (NASDAQ:GLIBA) and Alphabet Inc. (NASDAQ:GOOG).

According to its website, the Longleaf Partners Fund returned 14.81% in 2019, underperforming the S&P 500's 31.48% return.

Disclosure: No positions.

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