Is Lumen Technologies (LUMN) a Value Trap?

At first glance, Lumen seems like a steal at today's prices. For example, Lumen Technologies’s current market price is -81.80% below its Graham number.

Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock, but this metric should not be used in isolation. In fact, it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of The Intelligent Investor.

The Graham number is √(22.5 * earnings per share * book value per share), which for Lumen Technologies gives us a fair price of $21.60. In comparison, the stock’s market price is $3.93 per share, which implies that there is upside potential -- even for a conservative investors who require a significant margin of safety.

Sales Revenue Should Be No Less Than $500 million

For Lumen Technologies, average sales revenue over the last 5 years has been $20,418,600,000, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was $100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.

Current Assets Should Be at Least Twice Current Liabilities

We calculate Lumen Technologies's current ratio by dividing its total current assets of $11,536,000,000 by its total current liabilities of $7,169,000,000. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. Lumen Technologies’s current assets outweigh its current liabilities by a factor of 1.61 only.

The Company’s Long-term Debt Should Not Exceed its Net Current Assets

This means that its ratio of debt to net current assets should be 1 or less. Since Lumen Technologies’s debt ratio is 6.91, the company has too much debt. We calculate Lumen Technologies’s debt to net current assets ratio by dividing its total long term of debt of $30,170,000,000 by its current assets minus total current liabilities.

The Stock Should Have a Positive Level of Retained Earnings Over Several Years

Lumen Technologies had negative retained earnings in 2018, 2019, and 2020 with an average of $-827,710,077. Retained earnings are the sum of the current and previous reporting periods' net asset amounts, minus all dividend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.

There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years

Lumen Technologies offered a regular dividend since at least 2008, but the company annnounced that its generous dividend of $1 per share would be suspended.

A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years

We are going to compare Lumen Technologies's earnings per share averages from the two 'bookends' of the 14 year period for which we have data. The first bookend comprises the years 2008, 2009, and 2010, whose EPS values of $3.52, $3.23, and $0.74 average out to $2.50. Next we look at the years 2019, 2020, and 2021, whose values of $-4.92, $-1.14, and $1.91 average out to $-1.38. The growth rate between the two averages does not meet Graham's standard since it is -155.2%.

Based on the above analysis, we can conclude that Lumen Technologies does not have the profile of a defensive stock according to Benjamin Graham's check list — even though it is trading far below its fair value. Notably, the company has too much debt, negative retained earnings, negative EPS growth, and no longer offers a dividend.

In closing, here is a condensed overview f the company's financials:

2018-12-31 2019-12-31 2020-12-31 2021-12-31
Revenue (MM) $22,580 $21,458 $20,712 $19,687
Revenue Growth n/a -4.97% -3.48% -4.95%
Gross Margins -9.68% -43.07% -9.07% 21.18%
Gross Margins Growth n/a -344.94% 78.94% 333.52%
Operating Margins 2.52% -12.7% 4.64% 21.77%
Operating Margins Growth n/a -603.97% 136.54% 369.18%
Earnings Per Share -$1.6 -$4.83 -$1.12 $1.99
EPS Growth n/a -201.87% 76.81% 277.68%
Free Cash Flow (MM) $3,857 $3,052 $2,795 $3,601
FCF Growth n/a -20.87% -8.42% 28.84%
Capital Expenditures (MM) $3,175 $3,628 $3,729 $2,900
Net Debt / EBITDA 12.38 32.7 11.36 3.62
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.