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BofA retains underperform rating on Lumen shares ahead of 3Q earnings

EditorNatashya Angelica
Published 09/30/2024, 10:06 PM
LUMN
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On Monday, BofA Securities maintained its underperform rating on Lumen Technologies (NYSE:LUMN) shares, with a steady price target of $2.00. The firm's stance comes ahead of Lumen's third-quarter earnings, where several key investor concerns are highlighted.

These include the timelines for cash flows from the company's $5 billion fiber construction project and the realization of the potential $7 billion incremental construction pipeline. Moreover, investors are looking for updates on the potential divestiture of the Mass Market segment and further details on the EBITDA decline expected in 2025, along with a rebound in 2026.

Lumen is anticipated to report a decrease in revenue and EBITDA, attributed to the diminishing returns of high-margin legacy services. The company is also investing in proactive cost-saving measures and the establishment of a new construction business. Despite the share price's significant rise in the past three months, BofA Securities believes that the fundamental challenges facing Lumen's business do not justify the increase.

The analyst from BofA Securities pointed out that the company's focus on future cost savings and the setup of its new construction business is contributing to the current financial situation. Nonetheless, the firm expects declining revenue and EBITDA, which are seen as consequences of the ongoing revenue erosion from high-margin legacy services.

Lumen's strategic decisions, including the $5 billion fiber construction project and the exploration of divestment opportunities for its Mass Market segment, are crucial factors under scrutiny. Investors are particularly interested in how these moves will impact the company's financials in the near term.

In summary, BofA Securities has reiterated its underperform rating and $2.00 price target for Lumen Technologies, citing challenging business fundamentals that do not support the recent uptick in the company's share price. The upcoming third-quarter report is expected to shed light on the company's financial health and strategic direction.

In other recent news, Lumen Technologies has been the focus of several significant developments. The company recently disclosed its second quarter 2024 earnings, revealing a substantial operational turnaround with nearly $5 billion in sales, primarily driven by artificial intelligence hyperscaler customers. Lumen Technologies also announced a plan to achieve $1 billion in cost savings by 2027 through infrastructure simplification.

However, Wells Fargo expressed concerns about Lumen's substantial debt, which exceeds $19 billion in long-term maturities, and downgraded the company's stock from Equal Weight to Underweight. Wells Fargo also revised its price target for Lumen to $4.00, a change derived from a 5-year discounted cash flow analysis.

Simultaneously, TD Cowen maintained a hold rating on Lumen Technologies, raising the price target to $7. This decision was influenced by Lumen's recent earnings announcement and significant developments in its GenAI project.

These are recent developments that highlight a transformative period for Lumen Technologies, with the company aggressively pursuing new deals and partnerships in the AI space. Despite facing declines in revenue, the company's strategic focus on AI and private connectivity fabric, along with its commitment to cost savings and operational efficiency, suggests a forward-looking approach to overcoming current financial challenges.

InvestingPro Insights

Recent data from InvestingPro offers additional context to Lumen Technologies' financial situation. The company's market capitalization stands at $7.4 billion, with a revenue of $13.72 billion over the last twelve months as of Q2 2024. However, Lumen has experienced a revenue decline of 12.01% during this period, aligning with BofA Securities' expectations of decreasing revenue.

InvestingPro Tips highlight that Lumen is not currently profitable and analysts do not anticipate profitability this year. This supports BofA Securities' concerns about the company's fundamental challenges. The stock's high price volatility, as noted by InvestingPro, may explain the significant share price increase mentioned in the article.

Despite these challenges, InvestingPro data shows strong returns over various timeframes, including a 412.68% price total return over the past year. This contrasts with BofA Securities' view that the share price increase is not justified by fundamentals.

For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for Lumen Technologies, providing a deeper understanding of the company's financial health and market position.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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