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Wednesday, August 23, 2006

Level 3 Gets No Respect LVLT

Stocks: LVLT

Level 3 announced that it would provide networking serviced, including video transmission for online giant MySpace. No one knows exactly what that means, and no dollars were attached to the deal, so it was a one-day headline in some newspapers and then it disappeared.

No one seems much interested in Level 3 these days. DeutscheBank Securities put a "hold" rating on the stock recently. Not much of an endorsement. The stock jumped to $6 in the Spring on decent earnings and a belief that a pick up in bandwidth usage across the internet would benefit the company. And, it probably will. The stock now trades at $4.05, so a third of the value of the stock at its ebullient high has disappeared.

Level 3's revenue has been down each of the last three calendar years, but it has picked up a bit over the last four quarters. In the most recent reported quarter, the company said it was cash flow positive. A lot of investors are concerned that Level 3 has been growing by acquisition which drives shareholder dilution and a less pretty balance sheet. The concerns are well-founded.

According to Morningstar, debt net of cash at Level 3 is still above $5 billion. And, the company did little better than breakeven on a cash basis last quarter. With acquisitions, the company is starting to close in on the $5 billion a year revenue run rate.

The theory that bandwidth usage will increase because of audio and video streaming is often viewed at a rising-tide-lifts-all-boats phenomenon. But, that is not entirely true. Level 3 will hav to get more than its fair share of the market to drive a margin that will allow it to chip away at the huge mountain of debt it has accumulated. And, that will hold the stock down for awhile.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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