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Shares of Lumen Technologies Inc. have lost more than half their value this year and are headed for their worst yearly performance on record, but MoffettNathanson’s Nick Del Deo said even after its sharp plunge, the stock still looks “overvalued.”
“Broadly speaking, sentiment is awful — it’s interesting to note that there are no longer any sell-side Overweight/Buy ratings on the stock — and perceptions like
this can indicate that the balance of risks and rewards may be skewed to the upside,” Del Deo wrote in a note to clients Monday. But in the case of Lumen
LUMN,
he still sees risk to the name.
Del Deo observes a “challenged” growth trajectory for Lumen, though the telecommunications company has a new management team that is looking to shake up the business.
“The idea that the growth of its business segment can untether from the poor performance of the broader commercial wireline market (of which it accounts for about 20%) strikes us as implausible,” he wrote. “That part of the business is structurally disadvantaged.”
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While the company sees opportunity in its Quantum Fiber service — and Del Deo acknowledges that fiber upgrades could help the company with mass-market appeal — he also worries about whether Lumen’s funding situation will stand in the way of its maximum ambitions.
“The greatest risk to Lumen’s fiber deployment plans is its funding position,” he wrote. “Lumen starts with significant leverage and plans to invest heavily, further pressuring its leverage ratio.”
He acknowledged that Lumen recently cut its dividend to zero, “eliminating a key bearish catalyst,” though he said that his existing underperform rating was reflective of more than just a belief that Lumen would have to do away with the dividend.
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“The thesis was never solely dependent on a dividend cut, but rather the underlying pressures on the business,” he wrote. “Those pressures do not appear to be abating in any real way. We don’t believe repurchases will prove to be value accretive.”
Del Deo cut his price target to $5 from $6 on the stock, which declined 1.9% in Monday’s session. Lumen shares are off 54.1% so far in 2022 and are on track to log their worst annual percentage decline on record, with data going back to 1972, according to Dow Jones Market Data. The S&P 500 index
SPX,
is down 17.13% so far this year.
