Actions of Light technologies (NYSE: LUMN) grew by 39.4% in the first half of 2021, according to data from S&P Global Market Intelligence. The telecommunications company went from a very low valuation at the start of the year. Like many other value stocks in 2021, Lumen appeared to benefit from sentiment surrounding the economic recovery from the COVID-19 crisis.
From an operational standpoint, in the first half of the year, Lumen continued to post declines in revenue, which contributed to low morale and a low valuation. Yet the company also ripped off more profits for every dollar, increasing its profit margins, and there were even green shoots in some segments of Lumen’s results. This may have sparked optimism for the management turnaround plan.
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Lumen is repositioning itself from a copper-based telecommunications company with a large company in landline telephones to a company with a focus on fiber communications and advanced computing, data centers, content delivery and security markets. While Lumen is not a significant participant in all of these segments, these markets are expected to grow at an average growth rate of 14% through 2024.
Despite targeting these high-growth segments, Lumen’s revenue still fell 3.8% in the first quarter, slightly less than analysts expected as its traditional business continued. to influence the results. And yet there were some bright spots: Adjusted EBITDA margins continued to rise to 43.1%, down from 42.3% in the previous year quarter. Lumen’s fiber-optic infrastructure services have also grown in the enterprise and wholesale markets, and the new Quantum fiber-optic broadband has also increased its revenue. However, these high-profit segments still represent a relative minority of Lumen’s revenue base.
It remains to be seen whether Lumen can successfully transition to more new-age services – hence why the stock is trading so cheaply. Management expects between $ 2.8 billion and $ 3 billion in free movement of capital this year. AT market capitalization At just $ 14.6 billion, the stock is trading at a multiple of just five times the mid-term cash flow. This cheap valuation allows the company’s 7.5% dividend to be covered almost three times by cash flow.
Of course, Lumen also has high debt of about $ 31.3 billion last quarter; however, Lumen has also gradually paid off this debt over the past several years and has also been able to take advantage of the current low rate environment to refinance higher rate notes.
Lumen isn’t likely to be a millionaire growth stock anytime soon, and Wall Street is right to be somewhat skeptical; However, if the company continues to progress gradually in its business transformation, the stock has the potential to revalue much more, even after its good first half.
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Billy Duberstein holds shares of Lumen Technologies and has the following options: long January 2023 $ 12 calls on Lumen Technologies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.