Is Lumen Technologies (LUMN) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap

Navigating the Thin Line Between Value and Trap in the World of Investment

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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 1.46, recorded a loss of 3.64% in a day and a 3-month decrease of 19.91%. The stock's fair valuation is $8.77, 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 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.


However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Lumen Technologies 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, which raises a crucial question: Is Lumen Technologies a hidden gem or a value trap?

Decoding 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.

A Snapshot of 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).


Warning 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.


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 Technologies'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. Therefore, despite the seemingly attractive price, Lumen Technologies (LUMN, Financial) might be a potential value trap, underlining the importance of thorough due diligence in investment decision-making.

GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen . Investors can find stocks with good revenue and earnings growth using GuruFocus' Peter Lynch Growth with Low Valuation Screener.


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