Several recent developments make Level 3 (NASDAQ:LVLT) a compelling buy at the current level of $1.26. I expect to see excellent returns in the near future, and I am adding to my position based on the following:
Increasing Market Share
Recent data suggests that Level 3 is taking market share from Akamai. Dan Rayburn, Principal Analyst with Frost & Sullivan commented that Hulu is “passing serious traffic” to Level 3.
Increasing Focus on Value-Added Services
As stated in the recent earnings call, Level 3 is focusing more on Value Added services with higher margins. They have increased their sales force by 10% and we should see several new contracts, of similar or larger scale than the ABC Broadcast Operations deal announced in April.
DA Davidson issued the following note on May 11th:
“We are upgrading LVLT shares from Neutral to BUY as we expect sales and EBITDA momentum to turn positive with increased wholesale bandwidth demand. Large enterprise and government demand is also starting to increase. Our $2.00 target price is based on a 9.3x multiple on our 2011 EV/EBITDA estimate.”
Furthermore, on March 11th, JP Morgan upgraded the stock to Neutral when the stock was a $1.63, which is 29% higher than the current share price.
Telecom Ramblings Notes:
Now a year has passed from level 3 starts the "Go Local" initiative, decentralization of resources and decision-making to better serve the segment of middle market companies and, ultimately, unlock the value of its mark of 27,000 miles metro route. The company is now seeing the benefits of this new approach is embodied in this part of its business has stabilized and appears ready to contribute to the growth of the company.
Given the current share price along with the growth prospects, I firmly believe Level 3 is extremely undervalued. I closed out a long position in Sprint (NYSE:S) and Alcatel-Lucent (ALU). I will use the funds to buy more Level 3, and I will not even consider selling under $2. Level 3 trades at a 50% discount on a price to sales ratio basis compared to the industry average.
Disclosure: Long LVLT