Lumen, a legacy copper wire telco transitioning into the fiber optic world, has been led by a new CEO and management team focused on growth. However, recent sell-offs indicate a lack of trust in their guidance. So, here’s the deal: Lumen’s current valuation seems to be more about perception than actual guidance. They’re a legacy copper wire telco trying to transition into the fiber optic world, led by a new CEO and management team focused on growth. However, there’s been a lack of trust in the new management’s guidance, which led to a recent sell-off.

Now, I wrote a bullish article on Lumen last December, but unfortunately, the stock has taken a hit due to forward guidance. However, two key points from my initial article still hold true. First, the current valuation is based more on perception than actual guidance. Second, there’s a significant unrecognized factor of safety in their financials.

In their Q3-22 earnings report, Lumen showed declining revenues over the past few years. But here’s the interesting part: their operating cash flow was still strong and even surpassed their market cap. That got me excited about their potential. The story got a bit complicated with some divestitures, but the idea was to set the company up for growth by selling off declining businesses with higher EBITDA.

Now, let’s talk about the recent guidance for 2023. It caused quite a stir. Adjusted EBITDA was projected to be around $4.6B to $4.8B, and there were concerns about their leverage reaching a peak of 4.0X to 4.2X. Some folks on the message boards expected higher EBITDA and were disappointed with the guidance. Bankruptcy fears started floating around.

But hold on a second. Bankruptcy might not be as imminent as some people think. There are a few clues that suggest otherwise. Firstly, there was no going concern statement from their auditor in the 10K report. Secondly, their revenue stabilization guidance for 2024 assumes substantial improvement, indicating no immediate threat of bankruptcy. And let’s not forget the substantial cash flow available to cover interest expenses and potential debt refinancing.

So, what’s the bottom line here? Lumen is not facing near-term financial distress, although skeptics question their ability to refinance their debt in 2027. But here’s the thing: irrational pessimism in the debt markets is not unheard of, as evidenced by other similar cases. There might be more value in Lumen than the debt markets currently give credit for.

The recent investor day caused another hit to the stock, with debates shifting to future FCF and ROI on CAPEX. But growth CAPEX should be considered a legitimate form of shareholder value, even if it’s not receiving recognition at the moment. So, while there are concerns, it’s not time to panic just yet.

Alright, that’s my take on Lumen’s situation.