A revenue miss in Q1 hasn’t impeded Lumen Technologies’ (LUMN) forward charge in 2021. The stock has accrued share gains of 47% so far, and the forward momentum continued after the company delivered the first quarter’s financials.
Investors were content to overlook soft top-line numbers and instead focus on the bottom-line beat. Specifically, the telecommunications specialist generated revenue of $5.03 billion, amounting to a year-over-year decline of 3.8% and missing the estimates by $30 million. However, net income hit $475 million compared to $314 million in the same period last year, resulting in EPS of $0.44, ahead of the Street’s forecast by $0.06. Additionally, free cash flow more than doubled from $385 million a year ago to $850 million.
Looking ahead, the company reiterated its 2021 guide for Adjusted EBITDA between $8.4-8.6 billion, (compared to 2020’s $8.66 billion) and FCF of $2.8-3.0 billion – Lumen generated $2.98 billion in 2020. While Capex hit $3.7 billion last year, it is expected to come in between $3.5-3.8 billion.
“At the midpoint of FCF guide,” said Wells Fargo’s Eric Luebchow, “The dividend payout ratio implies ~38%, which we view as safe and our conversations with investors has shifted away from the risk to it being cut. Sales have reportedly started to accelerate in March after a slower end to 2020 and the early start to 2021, which we suspect will result in improved 2H over 1H.”
While Luebchow calls the quarter “mixed,” of more interest to the analyst were the noises made by the company regarding “potential strategic divestitures.”
“With residential fiber sale multiples at all-time highs, we see potential for LUMN to accretively sell a stake in its consumer business,” the analyst opined.
Going forward, management has also said it is “considering share buybacks,” and Luebchow thinks if an asset sale is completed, this could happen rather sooner than later.
All in all, Luebchow keeps an Overweight (i.e. Buy) rating on LUMN shares, while boosting the price target from $12.50 to $15. (To watch Luebchow’s track record, click here)
Mirroring Luebchow’s sentiment is Oppenheimer’s Timothy Horan, who makes similar points.
“With stable FCF, we think the dividend is safe and the 8% current yield is attractive,” the 5-star analyst said. ”The key is to invest in high-growth areas that will improve revenue growth while keeping costs low. Also, we think selling non-core assets and federal broadband subsidies would be catalysts for the stock.”
As such, Horan’s rating stays an Outperform although there’s no change to the $15 price target. (To watch Horan’s track record, click here)
On Wall Street, however, the two analysts stand out. Of the 3 other recent reviews on record, 2 say Hold and 1 recommends to Sell – all adding up to a Hold consensus rating. The average price target is more downbeat, too, and at $12.75, suggests the shares will decline by 3% from current levels. (See LUMN stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
