Over the past six months, Lumen’s stock price fell to $7.19. Shareholders have lost 6.5% of their capital, which is disappointing considering the S&P 500 has climbed by 9.3%. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Lumen, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Lumen Will Underperform?
Despite the more favorable entry price, we don’t have much confidence in Lumen. Here are three reasons you should be careful with LUMN, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Lumen’s demand was weak over the last five years as its sales fell at a 10% annual rate. This was below our standards and signals it’s a low quality business.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Lumen, its EPS declined by 17.8% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Lumen’s margin dropped by 7.2 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle. Lumen’s free cash flow margin for the trailing 12 months was 11.9%.
Final Judgment
Lumen doesn’t pass our quality test. Following the recent decline, the stock trades at 6.1× forward EV-to-EBITDA (or $7.19 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
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