3 Reasons LUMN is Risky and 1 Stock to Buy Instead

What a brutal six months it’s been for Lumen. The stock has dropped 24.9% and now trades at $4.32, rattling many shareholders. This might have investors contemplating their next move.

Is now the time to buy Lumen, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Lumen Will Underperform?

Despite the more favorable entry price, we're cautious about Lumen. Here are three reasons why we avoid LUMN and a stock we'd rather own.

1. Revenue Spiraling Downwards

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Lumen’s demand was weak and its revenue declined by 9.4% per year. This was below our standards and is a sign of poor business quality.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Lumen’s margin dropped by 7.5 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Lumen’s free cash flow margin for the trailing 12 months was 9.4%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Lumen’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Lumen, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 1.3× forward EV-to-EBITDA (or $4.32 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. Let us point you toward one of our top digital advertising picks.

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