Lumen Technologies (NYSE: LUMN) is an investment holding company which engages in the provision of integrated communications to residential and business customers. The company was founded in 1930 and is headquartered in Monroe, LA.
As of 29 Mar 2022, the company's stock is trading at $11.3 and year-to-date (YTD), it is down by 11%. Over the past year, the stock is down by 14% whilst the S&P 500 is up by 16%, meaning the stock has performed worse than the broader market by approximately 30% over this period.
Should you invest in Lumen Technologies at its current price? Let’s analyze whether the stock has potential or if it’s one to avoid.
The importance of fundamental analysis
‘Fundamentals’ are a set of key metrics which can help you, as an investor, assess the financial health of an organization as well as its growth prospects. Over the long term, a company’s stock price usually reflects its fundamentals, and analyzing these gives us a better understanding of the underlying trends which can tell us if the company is likely to be a good investment over the long term.
There are a number of fundamental metrics to look at, but the ones we'll focus on are price to earnings ratio (P/E ratio), price to book value (P/BV), price to sales ratio (P/S ratio), earnings per share (EPS) and debt. When they are analyzed together, these metrics can start to 'paint the picture' and help you understand if a company is a solid investment.
With this in mind, let's take a look at Lumen Technologies’s fundamentals and see if they can tell us anything about the company’s potential as an investment opportunity.
Lumen Technologies stock fundamental analysis
EPS is the first metric we'll look at, and this is used by investors to gauge the profitability of a company on a 'per share' basis. It is calculated as net income (after dividends on preferred stock) divided by the number of outstanding shares.
Based on its last reported balance sheet, Lumen Technologies's EPS is 1.9, and year-on-year, it decreased by 267%. Frankly, this doesn't give us much encouragement.
Another key metric to look at is the P/E ratio because it immediately tells a potential investor how cheap or expensive the stock is. The ratio tells us how much investors are willing to pay for a company’s earnings, and it is calculated by taking the price of a stock and dividing it by the EPS. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates it might offer more value.
LUMN has a P/E ratio of 5.9, based on its most recent financials. This is 7% lower than the average P/E ratio across an industry benchmark (which is 6.3) and tells us that the stock is inexpensive in relation to how much it earns.
Next, let's look at one of the most common valuation metrics - the P/S ratio. It is calculated as the current price divided by sales for the previous 12 months, and helps us get a sense of how much investors are willing to pay for a company's revenues on a 'per dollar' basis.
Lumen Technologies's P/S ratio is currently 0.6. Compared to the sector-wide average of 1, this is 38% lower, indicating that the stock may offer more value compared to other companies in the same sector.
Another key metric to look at is a company's price to book value (P/BV), which tells us how much investors are willing to pay for a company's assets. It is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book'). P/BV is used by value investors to identify potential investments, and a P/BV of 1 is usually considered a solid investment.
Based on its most recent financials, Lumen Technologies's P/BV is 1, and this is 42% lower than the average across the industry, which is 1.7.
Finally, when analyzing an investment opportunity, you should always take a look at how much debt a company has on its books, as this can help you assess how risky it is as an investment. Carrying a large amount of debt can be a red flag if the company is not generating enough free cash flow to service the debt.
Lumen Technologies has total debt of $30.5bn as of 29 Mar 2022, and this has fallen by 9% over the past year. Adjusting for $356m in cash & short-term investments, the company has a 'net debt' of $30.2bn.
Based on these figures, there's no denying that Lumen Technologies's current levels of net debt are a bit higher than we would like to see. The company might be relying in debt a bit too much so this is something to keep an eye on.
The bottom line on LUMN's stock
All in all, we’ve noticed some discouraging trends at Lumen Technologies.
Notably, the stock is down by 11% YTD and down by 14% over the past year. On top of that, compared to companies in the same sector, LUMN is not showing positive EPS growth y/y. This just doesn't give us much confidence that the company is on the right track.
Whilst we can't ignore the fact that it has a lower P/E ratio, lower P/BV and lower P/S ratio compared to companies in the same sector, this just isn't enough for us to be anything but lukewarm on Lumen Technologies's prospects as a long-term investment at the moment.
Please note that this analysis is general in nature and whether Lumen Technologies is a ‘buy’, ’sell’ or ‘hold’ for you will depend on your specific investing objectives, personal circumstances and risk tolerance. This analysis is based on historical data and does not take into account the wider macroeconomic environment, geopolitical issues or individual technicalities in the way a company conducts its business which can have a significant impact on a company's long-term outlook. Please conduct your own due diligence on Lumen Technologies before making an investment decision.