Why Level 3 Is a Must Own

Level 3 (LVLT) poised for major broadband demand. A bullish analyst view from Mike Sapien, a principal analyst for Ovum, a telecommunications, software and IT analysis company with offices worldwide.

As a result of LVLT's nine acquisitions in the last five years, the company not only supplies fiber optics network infrastructure to companies like Comcast Corp. (CMCSA), AT&T Inc. (T), Sprint Nextel Corp. (S) and EarthLink Inc. (ELNK), but it is moving into the "enterprise" sector, which LVLT calls its Business Markets Group.

That group is responsible for selling services directly to large businesses that require large amounts of bandwidth. Before some of the acquisitions, the company only sold services as a wholesaler, not to companies on the Fortune 500 list, major broadcast networks and large banks.

"I see their opportunity as getting into that enterprise market," Sapien said. "They need to go after the enterprise customers and grow that business."

Another area LVLT is well-positioned for is its Content Markets Group that works with companies to help deliver high-bandwidth video via the Web.

With increasing popularity of video, including high-definition video, streamed on the Internet, such as TV shows, movies, amateur videos and more, Charles "Buddy" Miller, LVLT vice chairman, expects that sector to grow immensely within the next five to 10 years.

"It's a trend we believe is going to be very big," Miller said. "We felt we needed to get out front of that."

LVLT works with companies such as ABC Inc., Fox Broadcasting Co. and The Walt Disney Co. (DIS), to establish servers around the country.

Instead of watching the latest episode of "Desperate Housewives" stored on a server in a place such as California, a user will watch it from a server closer to him or her making the video stream faster and more efficient.

"This trend of video on the Internet is very exciting," Miller said. "That's a significant change in our culture that I think is exciting. It's a trend that's not going to stop, and it plays to our strength."

LVLT has given investors lots of good over the past month including landing a big contract reported on June 16, 2009

A subsidiary of LVLT reached a 20-year contract with a “major multinational customer” that will generate at least $140 million in revenue in the first four years of the contract. LVLT is attracting business from larger telecoms as growing Internet use drives more demand for broadband capacity.

RUMORS

Sprint and LVLT are considering a joint venture that could combine the company's long distance businesses. A joint venture between Sprint (S) and LVLT would create a more formidable competitor to AT&T(T) and Verizon (VZ) in the markets for carrying data across the Internet.

The Wall Street Journal, citing unnamed sources who were familiar with the matter, said the two companies have held talks about a joint venture.

NOTE: I fully believe this joint venture is going to happen. It makes perfect sense for both companies. I see LVLT share price trading above $3 when deal is reported. The Dec $2.50 call options have been active.

I don't see much downside in LVLT and expect a move to $2 area soon. Watch for analyst upgrades in LVLT soon as this company is now a major turn around play and a must own in my opinion.

Disclosure: Long LVLT, no other positions.

Comments

[SouthernBea...:]

What about the fact that they have $6 Billion in debt? Like the company.....hate the debt!

Jul 02 08:48 AM

[China Expert:]

Debt ??? What a minor issue ......LOL........ How can the author ignore that the interest expense, debt amortization and capital expenditures that are choking this company ? There's a reason the bonds are CCC rated and yielding 13%.

This company exists for the benefit of the bond holders.....there's nothing left for the equity holders.





On Jul 02 08:48 AM beach7 wrote:

> What about the fact that they have $6 Billion in debt? Like the company.....hate
> the debt!

Jul 02 09:08 AM

[Larry House:]

This company is holding be a thread. Everything must work just right for them (no loss of business to competitors), or they are history. In a weak economic environment such as this, LVLT is a real longshot. To advise that it is a "must own" is irresponsible.

Jul 02 12:30 PM

[User 234091:]

If you want me to buy the stock, please tell me what you think the business is worth.

Thanks.

Jul 02 07:45 PM

[Paul Harper:]

Just looking at the "Jeremy Richards" articles to the right would seem to indicate that you favour high risk trades. Level 3, ETFC, AIG ...
For those with less exposure to markets, don't you feel that you should add something along these lines to our posts. Certainly not investments for the risk adverse that are trying to manage a 401k account.

Jul 03 06:01 AM

[wind4me:]

Debt is DEBT........its like a bad sexually transmitted disease, sticks with you for life till it kills ya

Jul 03 11:31 PM

[PJ Louis:]

A joint venture is not unusual. An acquisition is not unusual. What is unusual is “network sharing”. When most analysts are thinking "joint venture" they are likely thinking network sharing. There have been discussions of possible network sharing. Now that is an idea I like because it does not expose Sprint to the onerous implications of owning an expensive network. Remember that networks cost money to operate.

Debt issues aside. Even if debt was not an issue there are a ton of downsides to network sharing.

One of the many bad things about network sharing is simple alignment on operational priorities: Imagine, Sprint with one set of goals for the overall fiber network and Level 3 with another set of goals for the overall fiber network. Now imagine trying to share a network.

Jul 14 09:29 PM

[Nettligent:]

Level3 and Sprint are very good companies. They need to have a new competent management in place either through merger or kick them out.

Sep 22 04:11 AM

[Hephasteus:]

Everybody get on the boat. You don't want to be left on dry land when this thing sinks.

www.youtube.com/watch?...

Sep 22 11:01 PM