Telecommunications company Lumen Technologies (LUMN 1.63%) has been working to turn around its fortunes for more than a decade now. Management knows that turning around a company of its size financially is like steering a large ship away from an iceberg. If the company, led by CEO Kate Johnson, fails to execute, that could spell real doom and gloom. Yet, if leadership can slowly and consistently turn away from distress, the upside for investors down the road could be more than substantial.
A look at Lumen's third-quarter earnings report shows it is, in fact, avoiding disaster and heading to calmer waters. But the days of smooth sailing are still somewhat in the distance: Think 2028 or even 2030.
There is also still plenty of risk; the company carries about $17.5 billion in debt, a significant load compared to its revenue of $9 billion in the first three quarters of the fiscal year. Lumen's legacy business is on the decline as well.
On the flip side of those challenges are new business partnerships, a bold and clear vision for the digital future, and the successful restructuring of much of Lumen's debt.
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Lumen needs lower interest rates
Lumen Technologies (formerly CenturyLink) is a telecom offering various communication services, including network, security, cloud, and voice through its fiber optic and copper networks, data centers, and cloud computing services. It's been around for decades under different names and went public in 1978.
Of late, Lumen has been fighting an uphill battle to compete with the larger telecoms and has had limited success in the last couple of years. Lumen's investors will be rewarded if interest rates continue to fall and the company can refinance its debt over the coming years.
Its third-quarter results showed a savings of $135 million in annual interest expense year to date. This demonstrates real progress and a commitment to shareholders to improve its balance sheet. The overall debt total decreased from its peak of $37 billion in 2017 to the aforementioned $17.5 billion.
In September, management highlighted how it would improve growth metrics. Johnson said the company is seeking to become the backbone of the artificial intelligence (AI) economy. To do this, it will focus on delivering connectivity through its existing physical network. The business will also work to simplify the network for its customers and create partnerships within an ecosystem to extend Lumen's reach.
The company's sale of its home-fiber business to AT&T is expected to close in early 2026 for $5.75 billion, allowing Lumen to focus more on its enterprise solutions while simultaneously improving its balance sheet.
Besides that upcoming sale, improvements in its liabilities and new partnerships with Palantir and Microsoft should help strengthen its place among the large players in enterprise AI. This progress in the business's fundamentals might not have material effects on the stock price in the short term, but over the next several years, it could really bolster the shares.
For those reasons, Lumen's stock could appeal to investors who like to buy into turnaround plays. Currently trading halfway between its 52-week low and high, shares will be undervalued if the turnaround continues to progress.
NYSE: LUMN
Key Data Points
A lot of pressure on its balance sheet
Should interest rates remain the same or push slightly higher, Lumen will struggle to keep up with both its obligations and the capital required for the necessary modernization of its fiber network. The execution risks combined with an uncertain economy make the path to a full turnaround have some significant hurdles, which investors should not ignore.
An undervalued company, if it can stay the course
Lumen isn't a juggernaut compared to its counterparts, AT&T and Verizon Communications. That's not necessarily a bad thing, though. It has room to grow and can be a bit more nimble when it comes to its partnerships and diversifying revenue.
The company's transformation is still early on, but for those willing to wait at least a couple of years, it deserves a second look. If investors are confident that interest rates are going to fall and the company's leaders can continue improving its balance sheet while growing alongside the AI economy, Lumen is currently undervalued.
