Lumen: Investor Day Can’t Offer What Investors Need—Proof the Return to Growth Can Actually Occur

Lumen’s LUMN investor day provided a bit more granularity into management’s plan to return the business to growth and some specificity on the multiyear financial forecast. More broadly, however, there was no change to the narrative that a turnaround will occur in 2025 and the firm can be a long-term grower despite the continuing decline of the firm’s sizable and profitable legacy businesses. We have no doubt that Lumen’s stock is extraordinarily undervalued if management can achieve anything close to what it projects, but with a large debt maturity looming in 2027, the question remains whether Lumen will find credit available to roll over the debt. Here again, if management is close to its projections, we think debt refinancing in 2027 will be no problem. However, after years of hearing similar narratives under past management teams, we believe only results will comfort investors, meaning there’s no substitute for time when contemplating what could calm the market. We are maintaining our $5 fair value estimate.

There was no change to management’s expectations that total revenue and EBITDA will continue deteriorating through 2024 while there may be as little as no free cash flow during that time. However, the specific long-term forecast now puts numbers on the return to growth in 2025, and, at the midpoints, management expects 2027 revenue and adjusted EBITDA to be higher than 2023 levels by 4% and 12%, respectively. While these growth levels would seem remarkably uninspiring for a typical company, they’d be fantastic for Lumen, which will have generally seen both metrics continually decline each year for a decade. Management also anticipates financial leverage dropping nearly a full turn, to 3.3 times, and free cash flow of $300 million-$500 million in 2027 before rising another $1 billion in 2028 when growth in fiber capital spending for the mass markets business concludes.