TheJuice Updates his LVLT Model for 2009

April 6th, 2009 by · 1 Comment

[TheJuice blogs about his financial models and projections for telecom companies, most frequently about Level 3 Communications.  If you have something to share on Telecom Ramblings, contact the webmaster]

Hello All. Attached are my updated models for Level 3 Communications (NYSE:LVLT, news, filings).

The first is my sense as to the numbers for the 2009.   Nothing special here, I’ve modeled a dip in Q1 and then we dig our way out as the year progresses.  I think we are looking around (50M) in FCF in Q1 and I hope we are able to hold our margins over 60%.  Keep in mind that as we include off-net revs in Enterprise we will have lower margins the question is how much relative to the whole.  I think many investors will focus on the headline rev numbers but the real story could be around possible margin compression.

The next spreadsheet is a model that shows annual projections through 2012.  I’m putting this out there because there is significant conversation around whether LVLT will go BK.  The thought is they won’t be able to roll over the 11 or 12 debt at rates that don’t destroy all their FCF progress made over the next year or two.  What I hope you see is that LVLT could *at least in theory* pay off all the debt with cash without seeing any pickup in sales between now and 2013 [the year of the debt wall].  My core assumptions in building this are 1) revs stay flat, 2) gm rises as network integration and unity continue, 3) sg&a has small but continuous improvement.  Of course one could say these assumptions are too aggressive etc. but if you compare 2012 ending ebitdas margin of 32.4% to TWTC’s current ebitdas margin >30% I think one could argue it’s very doable.   I believe this is the general story LVLT management sold to the debt investors at the end of 2008 in order to get them comfy their new positions wouldn’t get stepped on.

The final spreadsheet is an ev/ebitdas calculation with all the corresponding data around LVLT’s debt complex, pricing, my ebitdas estimate and the ratios.  What we can see is the entire complex has seen an app. 10% improvement of market value in the debt from app. 72% to 78% while the stock went from $.66 to $1.04. I guess that’s what you get when you’re levered 6-to-1 debt/ebitdas.  My calculations say we have an ev/ebitdas value of around 6.75 times, this is pretty close to what I believe VZ paid for Alltel which I think was 7 times.  Now, looking at Yahoo’s calc of ev/ebitdas they come up with 7.5 for LVLT vs. 6 for TWTC, and app. 5 for T/VZ/SVVS/GLBC. What this points out to me is that we are on the upper end of the relative valuation band and probably hitting the ceiling of the recent equity move – unless of course the market itself is going to start valuing all metro/long haul assets higher.

As a consequence, as I posted on IV, I sold out of my position in the stock and the debt and will *cross my fingers* wait to see lower equity/debt prices.  This is not something I like to do, or something I have done that much of, but the swings in prices have been such that if I can catch a big change the percentage gain makes it worth the risk – at least to me but then I could get really burned, we’ll see.

As always, any comments on how to improve/correct etc. are always appreciated. Best of luck in the markets and to LVLT salepeople!

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