Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

Previous Posts

Thursday, August 03, 2006

Level 3 Keeps Drifting Down

Stocks: (LVLT)

Shares of Level 3 are quietly dropping, a bit at a time. Goldman Sachs recently upgraded the stock from "neutral" to "buy". That ought to be worth something. But, at $3.59, the stock is at its lowest level in almost four months.

The company just completed the purchase of Looking Glass Networks, which provides facilities for metropolitan transport services. That cost Level 3 over 21 million shares and over $70 million in cash. So, there will be some dilution. But, that is old news.

CIBC took a more dim view of the company's prospects and was quoted in Forbes as saying that that the company's "legacy revenue" would decline over the next couple of quarters while IP and VOIP revenues rise. Again, old news. And, CIBC called for the company to be on a positive track within the next six months.

All of this should be priced into the stock, particularly since Wall St. can look two or three quarters out and factor that into buying and selling considerations.

Level 3 may put out the most arcane financial statements of any large company. But, from its last quarterly release, two things are clear. Revenue rose sharply from $894 million in the June quarter last year to $1.5 billion this year. Net loss was $201 million, just slightly worse than a year ago. Interest expense was $170 million compared to $139 million in the year ago period.

Long-term debt at Level 3 is $6.6 billion. The company's cash and marketable securities are a little over $2 billion.

A lot of smart Wall St. money took a big bet on Level 3 back in early 2005 when the stock dropped below $2. Buy May 2006, they were looking at a triple at $6, and a lot of them probably took a good deal of money off the table. That would be the smart move. But, it takes a lot of the institutional buyers out of the market. For now, at least.

Level 3 is also a stock that has burned a lot of investors. The stock dropped from over $4 to $2 in late 2001. It got back up to almost $7 and then dropped back to just above $2 in early 2002. Some investors who got in at close to $7 in early 2004 rode it down to under $2 in early 2005.

Wall St. has a long memory, and, if they leave Level 3 alone for awhile because they felt they got fooled once before, the stock may have to drop a ways before they come back in.

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

Powered by Blogger