Level 3 On the Move

January 10th, 2009 by · 7 Comments

Shares of telecommunications carrier Level 3 Communications (NYSE:LVLT, news, filings) had quite a week, entering Monday at $0.68 and closing Friday at $1.49, up 119%. I thought we were in the throes of a deepening recession that is going to start killing off anyone with debt? Volume just got bigger every day, the volume progression was 9M,16M,19M,54M,61M. What happened? Not much actually, and the rest of the sector was not nearly so lively.  I don’t think we can tie it back to one event. Instead, I’d say there has been a confluence of factors:

Realization that the company is safe for a while – after raising the $400M and buying back as much debt as they could, it appears that there is no immediate danger to the company from the credit crisis. A deep enough recession could make it worse later, but for now the danger has receded.  The vultures have moved on.

The end of the refinancing activity – many have speculated that while the company was tendering for bonds, there was a collar around the stock. I’m not an investment banker, I have no idea if or how such things are done, but I know that people think they are and perhaps that alone can affect things and volume dried up for a month. Regardless, it’s over now – the stock came out of limbo with the New Year.

The end of the year – No, not tax loss selling, what gains would people need to offset? 🙂  I just think that most funds didn’t want Level 3 on their books at the end of the year.  But as soon as the new year started, there’s some speculation going on, which leads us to:

Speculation and leverage – of all companies in the sector, Level 3’s enterprise value is made up of the most debt, which means that there is lots of leverage in the common shares. When things are bad, it goes down fast. When things aren’t that bad, the rebound can be just as fast.  And because of that, speculators are always on the lookout for its moves so they can hitch a ride.

The large short position – no I’m not going to scream short squeeze. But the large sustained short interest does tend to magnify changes in perception around the stock. When it moves, it really moves.

The incoming Obama administration – with lots of promises flying about making a push on broadband speeds and penetration with lots of government dollars, traders are looking for a way to play it. Level 3 won’t get much of it regardless, they don’t do the last mile – but they would be a beneficiary anyway. More people with faster broadband will mean more opportunity for fiber operators.

The Citi EMT conference – Level 3 gave a talk and managed not to disappoint anyone, and reassured investors that SG&A reductions continue and that free cash flow really is going to be positive in 2009.  And in parallel, other fiber operators in general did not seem too worried by the economy. Most were cautious, but none of them rang the alarm bells.  q  even said Q4 trends were like Q3, which may not be better but it wasn’t worse either and these days that is good news.

None of these are that big a deal.  Put them all together, and you have a perfect storm and a 119% gain in 5 days.  After all, it has to go up sometimes doesn’t it?  Of course, none of it is permanent in and of itself. It could keep going or go back down, who knows? We have no new operating data, so we don’t really know what is going on with the company inside. In about 4 weeks we will probably hear about Q4, and that will illuminate matters.

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Categories: Financials · Internet Backbones

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7 Comments So Far

  • carlk says:

    The real reason is that, you just can’t fit this stuff on a spread sheet!

    As always, it’s proof certain of the lunacy surrounding EMT.

    Call the financial professors across the globe!

  • Rob Powell says:

    I’ll bet I could if I tried 🙂

  • p. Merch says:

    Add GLBC’s consolidation comments and realization that LVLT is the natural consolidator

  • carlk says:

    Well, if you couldn’t, I’m sure that, “The Juice” and “Cody Klein,” could! 🙂

    p. Merch is correct, “Next acquisition” onto our most advanced and sophisticated CHASSIS starving for high margin “REVENUES,” please!”

  • Rob Powell says:

    There is very little chance a LVLT/GLBC deal could happen until the credit markets loosen up. Too much debt would need a refinance. Besides, the street would run screaming from the uncertainty of M&A right now. If anything they are reassured that LVLT can’t do anything for a while besides fix their operations and improve cash flow performance.

  • Morty says:

    I would not argue with any of your above named reasons ,however, I do think there is one standout reason .
    People have realized that it is not***all*** about rev growth . The bottom line is Free Cash Flow !!!
    LVLT is about to prove that they can generate more F/C/F than anyone had anticipated . This will come from cost cutting over the next two yrs & lower cap/ex brought on by the lower rev growth rate,completion of Unity [ 150 in cap/ex over the last two yrs] & reduction in maintenance cap/ex from 150-200 down to 150 .

  • Anonymous says:

    I think Morty is right but I would offer two other thoughts:
    1.) Bear raiders assaulted this company because of their debt load and relatively easy borrow. What they got wrong was that pushing the stock from $3->$0.57 led the company to buyback their debt but only marginally dilute equity holders (~15%) but it did not result in the crisis of confidence in customers and partners the way it did with Bear Stearns, Freddie Mac and others because a.) telecom is a utility b.) telecom has seen this before.

    So, the shorts have taken their bankruptcy thesis off the table.

    2.) Technicals. When the stock use to trade in extremely large volume 2 years ago and to get a short position was easy. Today, if memory serves, about 70% of the stock is in 10 hands and something like 50% of the stock is in 3 hands so when the stock moves higher it becomes much harder to borrow than they remember. So when the stock spikes the squeeze can be violent. In a sign of the times, just in mid December it was taken out of the Nasdaq 100.

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