Lumen Tech (LUMN) $5.50 Cyclical,
Stock has appreciated a lot this year, 220%, but 5 year and 10 year stock returns were negative, because as a a Fiber Network Telco – it was a cyclical, commodity, capital intensive, high debt, low margin business. Sales have declined in the last 10 years by 21%.
What is different now – Corning and Microsoft has help it stave off bankruptcy, its debt load was too high for it to sustain its business, otherwise.
- Lumen’s partnership with Corning for fiber network expansion will support business growth and increased free cash flow forecast for 2024; this may lead to debt rating upgrade and improved growth. Markets responded enthusiastically to the news, since Lumen significantly increased its capacity to key cloud data centers. AI has heavy workloads and uses high bandwidth applications since it involves massive amounts of data.
- They have a similar customer supply deal with Microsoft.
I tend to avoid commodity cyclicals because they don’t have sustainable, recurring growth, you have to constantly watch over your shoulder, and in Telecom and Networks capital requirements are usually very high. Plus in Lumen’s case the stock has jumped for a bottom of $1, so much of the good news is in the price. If you decide to buy on a dip you may get a solid bump for a year or two, but not a long term great company. High Risk/High Reward for a year. If they continue to get more deals and AI network expansion continues yes this could be a good deal, but this industry is intensely competitive and price sensitive.