The stock of Lumen Technologies (NYSE:LUMN, 30-year Financials) appears to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock 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. At its current price of $13.43 per share and the market cap of $14.7 billion, Lumen Technologies stock shows every sign of being modestly overvalued. GF Value for Lumen Technologies is shown in the chart below.
Because Lumen Technologies is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Lumen Technologies has a cash-to-debt ratio of 0.01, which which ranks in the bottom 10% of the companies in Telecommunication Services industry. The overall financial strength of Lumen Technologies is 3 out of 10, which indicates that the financial strength of Lumen Technologies is poor. This is the debt and cash of Lumen Technologies over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Lumen Technologies has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $20.7 billion and loss of $1.14 a share. Its operating margin of 17.40% better than 74% of the companies in Telecommunication Services industry. Overall, GuruFocus ranks Lumen Technologies's profitability as fair. This is the revenue and net income of Lumen Technologies over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Lumen Technologies is -11.9%, which ranks worse than 86% of the companies in Telecommunication Services industry. The 3-year average EBITDA growth is -18.2%, which ranks worse than 89% of the companies in Telecommunication Services industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Lumen Technologies's return on invested capital is 9.10, and its cost of capital is 7.26.
In conclusion, the stock of Lumen Technologies (NYSE:LUMN, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 89% of the companies in Telecommunication Services industry. To learn more about Lumen Technologies stock, you can check out its 30-year Financials here.
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