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Shares of Level 3 Communications (LVLT) reached an intra-day high on Wednesday of $2.34, a mere 5% away from its 52 week high of $2.46. The question that I keep coming back to is why? It is remarkable how resilient the stock has behaved even in the face of a bearish market. For the past three months, I have not seen the catalyst for this surge in price. I have been waiting patiently for any kind of justification to emerge but a rational explanation has not been provided. In a previous article, I proclaimed the stock had gotten expensive, but today, even with no new announcement, I can say that the stock is now fairly valued with more room to grow.

The reason for this change in sentiment is simple; the stock has sufficiently consolidated from its recent high "irrational exuberance" to a sustained trading range. In other words, it has given me a reason to believe in "the story."

In my previous article, I mentioned that my fair market value for the stock was $2. Not only did I feel that this valuation was justified based on Level 3’s fundamental metrics, but I felt it needed to test below that range in order to continue its upward movement with minimal possibilities of dipping below that level. In a response to a previous comment, I said the following:

"I think I am seeing the same thing as your chart, though I don't expect $1.80 to hit, but I do see a possible retest of the $1.95 to $2 range."

6-20 Price.PNG
(Click to enlarge)

On Monday, I got the confirmation that I was looking for as the stock hit $1.94 and quickly bounced off that low on to close for the day at $2.15. This event for many reasons was pretty significant in affirming the long term direction of the stock; from a momentum standpoint.

Level 3 still has some challenges ahead; their debt has always been a concern of mine. But what continue to offer some optimism are the synergies that it will have with Global Crossing (GLBC) as joint entities. I have always been one of the biggest supporters of the company and the stock. I had previously written about the excitement that the company had generated when it announced earlier this year of its pending merger with Global Crossing.

I wrote then how I thought the Global Crossing transaction made Level 3 more valuable or even undervalued upon the announcement. I pointed to how the deal would create a company with a unique capability to meet local, national and global customer requirements in a wide range of markets. By combining the strengths of each company, the new entity will offer enterprise, government, wholesale, content and web-based customers a comprehensive portfolio of end-to-end data, video and voice solutions.

I was immediately excited upon the announcement of the deal though I was still a bit uncertain if it justified establishing a position at the time. I became immersed with thoughts increased bandwidth capacity and ways the company could leverage its network and lease out its lines to content providers such as NetFlix (NFLX) and Apple (AAPL). I also envisioned Level 3 to somehow being acquired to serve as a conduit and/or a bridge from one end of the world to another. A company such as Cisco (CSCO) comes to mind who not only have the cash available, but also has the networking component as well as a growing server business to become a total service solution to rival that of IBM (IBM) and Hewlett-Packard (HPQ). Another company that was said to be interested in Level 3 at one point was Google (GOOG). This was prior to their network building initiative. It was said that they were looking to a company with already an existing network.

Prior to the Global Crossing deal, many experts who studied Level 3’s business and books were firm believers that the company needed the acquisition or some means of leveraging its debt to present more balance. It is now quite evident that Level 3 has pretty much extended its resources and has done as much as it possibly can with not only its current assets, but also how it is structured. Though the company has made some improvements and realized some incremental growth, margins (in my opinion) remain one of its biggest challenges, but one that I think it will be able to overcome.

Summary

With future cloud demand, one has to realize that a market exists for the services that Level 3 offers. With Global Crossing on board, the combined companies will be able to do some great things. I remain intrigued by CDNs or "content delivery networks" such as Level 3 who will be well positioned to provide the type of optimal network and bandwidth access that both business customers and well as consumers will demand from content locations such as Apple’s iCloud, NetFlix (NFLX) as well as the potpourri of services provided by Amazon (AMZN). With a close of $2.28 on Wednesday and $2.50 all but a sure thing, it is conceivable that this momentum can propel the stock towards $2.60 to $2.75 over the next couple of months.

Source: Level 3 Confirms Upward Trend