LVLT - Level 3

[Ben Graham]

Good morning ValueCarl,

 

The bombs are bursting and our LVLT flag is still standing!!!! I salute you Carl on a job well done.

 

Oh say can you see those WEB bucks  ;D

 

 

Cowen upgraded Level 3 citing improved visibility of its Global Crossing synergies and integration costs.

 

Cowen's summary: Conclusion: We are upgrading Level 3 to Outperform from Neutral based on

better visibility of net synergies/integration costs tied to its acquisition of

Global Crossing and the consequent impact we expect it to have on EBITDA over

the next few years. With the stock trading below where it was the day before the

announced acquisition last April and only two out of 14 analysts recommending

the stock, we believe our contrarian call could provide significant upside.

 The reasons we were initially excited about the acquisition are

still true today. When Level 3 announced the acquisition of Global

Crossing we highlighted that the transaction was positive because it would

1) be significantly accretive to EBITDA, 2) improve the company's capital

structure, and 3) enable the company to reduce its interest rate.

 Synergies throughout 2012 will have a very meaningful impact

on 2013. We believe the true impact of net synergies will not be reflected

until 2013. While the 2012 EBITDA guidance the company provided

yesterday implies organic EBITDA growth of 20% to 25% we believe EBITDA

growth can accelerate from 21% in 2012 to 25% in 2013.

 Biggest risk to our thesis is that we still have no evidence of

said synergies. If Level 3 delivers results that are in-line with 2012

EBITDA guidance we believe the stock will react favorably although

admittedly the company's previous track record surrounding

acquisitions/integrations suggests it is not necessarily an easy task.

 

 

http://www.investorvillage.com/smbd.asp?mb=444&mn=110094&pt=msg&mid=11436102

 

http://finance.yahoo.com/news/Level-3-upgraded-Outperform-theflyonthewall-3449379565.html?x=0

[Ben Graham]

Southeastern Asset Management

 

...we pay great attention to corporate governance issues, particularly when evaluating the

management teams at our companies. When we take an ownership position in a business, we look at it as if we

are buying that business for ourselves. A company must meet our criteria of "Good Business, Good People, and

Good Price". This requires an in-depth review of both the sustainability of the business and the capability and

shareholder-oriented nature of the management teams at all portfolio companies. We view our investment as a

true partnership. We want honorable, trustworthy, shareholder-oriented, and capable management partners

running the companies we own. They must have a proven operating track record for producing profits. They must

also demonstrate capital allocation skills, looking at reinvesting cash flow based on the highest probability of

value creation. They must have a history of being shareholder oriented in their leadership. Finally, the

management team should have significant ownership of the stock to align their interests with our own. We have

found that the highest quality management teams produce the best long-term growth in shareholder value.

 

 

Engaging with Companies

 

As discussed above, our three key criteria for a qualifying investment are: good business, good people, and good

price. Good people are defined as: capable operators and capable capital allocators who are honorable and

trustworthy, shareholder-oriented, and properly incented. We spend a great deal of time researching the

operational history and personal backgrounds of our corporate partners to ensure that they possess the requisite

business capabilities, have a history of treating shareholders well, and have a high degree of personal integrity.

We will not typically invest in a company where we do not feel the management team meets the criteria outlined

above.

The research team monitors and meets with management at our portfolio holdings on an ongoing basis. If the

assessment of management deteriorates for any reason, the analyst includes this in his research notes which are

passed to the investment team. The team determines the best course of action. There have been and will be cases

when we make a mistake in assessing a management team and will become "active" in a name to get shareholder

value recognized. The scope of actions varies on a case-by-case basis and may involve (but not be limited to) filing

a 13D, meeting with the management team to encourage better capital allocation practices, and/or voting against

management.

 

http://www.longleafpartners.com/downloads/UK_Stewardship_Code_Position_Paper.pdf

 

They must also demonstrate capital allocation skills, looking at reinvesting cash flow based on the highest probability of value creation.

 

Think ahead - The cash flow streams will be huge, huge - after tax, no tax ( NOL's carry forward )

[Ben Graham]

Level 3 is a rare bird

 

http://www.bengrahaminvesting.ca/Resources/Video_Presentations/Guest_Speakers/2005/Hawkins_2005.htm

[Guest ValueCarl]

Some people still believe "RARE BIRDS" are headed for EXTINCTION. Excluding the utter stupidity of a discount retail store operation analogy, on top of cheer leading for Akamai, all at the same time this writer's bosses at The Fool basically maintained their full stake as of 12/31/11, this is what makes one bird watcher's collection of rare birds significantly more valuable than another.

 

Jeer loudly if he is wrong, he says, eh?

 

http://www.fool.com/investing/general/2012/02/11/this-just-in-upgrades-and-downgrades.aspx

 

Foolish final thought

Call me a pessimist, but the more I look at Level 3's tie-up with Global-C, the more it reminds me of another ill-fated merger of a few years ago -- when Sears married Kmart to form Sears Holdings (Nasdaq: SHLD  ) . Envisioned as a way to create a rival to Wal-Mart, the merger turned out more as review question for a (really easy) pop quiz in math class:

 

1 bad business 1 other bad business = 1 really bad business

And of course you know how that one worked out: Over the past five years, Sears Holdings shares have shed some 75% of their market cap. And that's really the moral of this story. Even with arms linked, two free cash flow-negative companies are always going to have a hard time competing with a rival that sports negative free cash flow. Sears couldn't beat Wal-Mart. I don't expect to see Level 3 beat its archrival Akamai, either.

 

In fact, while I'm not a huge fan of Akamai, I'm so sure Level 3's stock is a dog that I'm going to head right over to Motley Fool CAPS right now and publicly predict that the stock will underperform the S&P 500 for the foreseeable future. Feel free to follow along -- and jeer loudly if it turns out I'm wrong. 

 

 

 

http://www.nasdaq.com/symbol/lvlt/institutional-holdings?page=7

[DCG]

While you've criticized me and others who've mentioned AKAM on here, iif you had owned AKAM for the last 2 & 1/2 years, you would be up around 90%, compared to being in the red with LVLT. You also would've done much better just owning the S&P500.

[Guest ValueCarl]

In the short term, the stock market is a voting machine, while in the long term, it's a weighing machine.

 

You might be right since the big "short term" almost 100 percent move Akamai has had from its $20 low to nearly $40 high on "seasonal" only results, recently, because I don't have a 2.5 year chart and wouldn't care to waste my time doing the math, but that's not why I am invested in BIG (3). 

 

Swing at the FAT LVLT PITCH, DCG, swing!, you BUM!  ;) By the way, those Akamai PIRATES as well as their charlatan CEO talking as though he was the reason for the delivery of The Super Bowl on net, refuse to give guidance and Wall Street isn't going to RING A BELL for you when their GIG--pun intended--is up! 

 

http://finance.yahoo.com/q/bc?t=2y&s=LVLT&l=on&z=l&q=l&c=akam   

 

 

[Guest ValueCarl]

Wall Street seems readying to remove their collective heads out of their asses! This morning, The Great Bear from Oz, Morgan Stanley, came out from behind its CURTAIN to decree Level 3=OUTPERFORM!

 

http://www.forbes.com/sites/ericsavitz/2012/02/23/level-3-morgan-stanley-ups-to-overweight-shares-rally/?partner=yahootix

 

I wonder if it had more to do with yesterday's after market 8K which Big (3) filed?

 

http://www.sec.gov/Archives/edgar/data/794323/000110465912011747/a12-5658_18k.htm

 

One point of information includes the fact that a Delaware address for conducting corporate business is a very shareholder friendly place to live, one that might encourage BIG (3) into another spectacular MNA following up with Global Crossing. As importantly, circa 2002, Jim Crowe referenced how WEB would have PREFERRED purchasing "PREFERRED STOCK"--WEB's secret weapon--in lieu of his "Jr. Convertibles" which he ultimately settled upon, prior to certain financial metrics being attained, and earning them the right to establish themselves as a Delaware Corp., thus enabling PREFERRED SHARES to be issued. 

 

It seems almost IRONIC, that just as the Level 3 Stars are aligning to BROADBAND NIRVANA, i.e. HEAVEN, one of our SUPERNOVA cyberspace contributors, Ben Graham, has been denigrated to CYBER DUST by this board's HOST!

 

This DEEP VALUE INVESTOR, and FIGHTER for the CAUSE and MEMORY of the policies, procedures and applications by The Father of the Science/Art, Benjamin Graham, Warren E. Buffett's Messiah, will be sorely missed by all who VISIT this SITE.  :'(

 

MESSAGE to the BOARD: Buy Big(3) and PROSPER. FAT PITCHES like this only come once in a LIFETIME!  ;)

[brker_guy]

Looks like Mr. Carlos Slim wants to be in the Internet TV business now:

 

http://www.forbes.com/sites/kerryadolan/2012/03/12/carlos-slim-talks-about-the-backdrop-to-the-new-internet-tv-network-featuring-larry-king/

 

Well, I would recommend to him to start with the A's in his rolodex and stop at Level (3).  :D ;D

[Cardboard]

http://www.forbes.com/sites/ericsavitz/2012/06/05/netflix-shifts-traffic-to-its-own-cdn-akamai-limelight-shrs-hit/?partner=yahootix

 

According to Crowe, Netflix was supposed to see low costs using Level 3 as a vendor because they had all these supposedly competitive advantages. Now, they are developing their own.

 

I don't know what Watsa and Hawkins are waiting for here to replace the CEO. While he is excellent in the propaganda of a grand vision, the execution is absolutely terrible.

 

Cardboard

[Cardboard]

Jim Crowe this morning: "We need to keep doing what we have been doing."

 

I am sure that keeping revenues flat and free cash flow close to nil will deliver great value to shareholders!

 

I am out! Finally saw the light! I consider myself very lucky that I made a small profit overall with my various Level 3 trades. It is indenfensible to keep holding a stock where it trades at over 8 times EBITDA to EV and with no revenue growth, no matter how much money they have sunk in the ground and into their plants.

 

Maybe that the story will change someday as I was hoping to see when I got in. Either I was too early like all other Level 3 investors before me or it will never materialize. There are too many good stories, with tangible improvements out there to keep hoping for a turnaround in the fortunes of this dog.

 

Cardboard

[bmichaud]

Jim Crowe this morning: "We need to keep doing what we have been doing."

 

I am sure that keeping revenues flat and free cash flow close to nil will deliver great value to shareholders!

 

I am out! Finally saw the light! I consider myself very lucky that I made a small profit overall with my various Level 3 trades. It is indenfensible to keep holding a stock where it trades at over 8 times EBITDA to EV and with no revenue growth, no matter how much money they have sunk in the ground and into their plants.

 

Maybe that the story will change someday as I was hoping to see when I got in. Either I was too early like all other Level 3 investors before me or it will never materialize. There are too many good stories, with tangible improvements out there to keep hoping for a turnaround in the fortunes of this dog.

 

Cardboard

 

Come on Cardboard, Mr. Market has no clue what he is talking about! Hang in there!

[brker_guy]

I love Mr. Market, don't you, bmichaud?

 

LVLT posted really huge EBITDA number, but no one seems to care.  Oh well!

[bmichaud]

I love Mr. Market, don't you, bmichaud?

 

LVLT posted really huge EBITDA number, but no one seems to care.  Oh well!

 

I love him too! I also love profitable, growing businesses....as does he...

[txlaw]

I love Mr. Market, don't you, bmichaud?

 

LVLT posted really huge EBITDA number, but no one seems to care.  Oh well!

 

I love him too! I also love profitable, growing businesses....as does he...

 

Haven't looked at the press release/numbers yet and won't have time to do so until the weekend probably.  Was Europe the primary reason for lack of revenue growth?

 

I would note that LVLT is profitable on an owner earnings basis.  GAAP understates what LVLT actually earns from an economic perspective.

[SI]

I have been wrong here for the past $3 dollars but all the noise on this security seems overdone. I posted this elsewhere but struggle to understand this stock reaction so I'll add it to this conversation.

 

What is ironic for L3 is that they said they saw record orders in 2Q of 17%. Where in this economy are you finding that? If you do, where do people not care?

 

The reason it is rightly lost on the market is that it is nearly the exact same thing they said(if memory serves wasn't 17% order growth exactly the pre-broadwing number?) during the aforementioned "toe stubbing" so people treat it as a boy crying wolf. I think with: a real board of directors, a proven/new guy running operations and soon to be the company, debt concerns off the table(net debt/ebitda is still 5x but that is 50% less than the 2008 period referred to above), a more consolidated industry and fcf/eps positive in all sellside models for next twelve months - the buyside’s institutional memory is deceiving them.

 

Maybe they are right, but if the CLECs, XOHO, Paetec and C&W Worldwide are worth a bid - hard to imagine NTT, Tata, Comcast or CTL letting this asset remain neglected especially when those entities can't find growth despite their capital strength.

[twacowfca]

I love Mr. Market, don't you, bmichaud?

 

LVLT posted really huge EBITDA number, but no one seems to care.  Oh well!

 

I love him too! I also love profitable, growing businesses....as does he...

 

Haven't looked at the press release/numbers yet and won't have time to do so until the weekend probably.  Was Europe the primary reason for lack of revenue growth?

 

I would note that LVLT is profitable on an owner earnings basis.  GAAP understates what LVLT actually earns from an economic perspective.

Why? Is (maintenance ?) capex a lot less than depreciation?

[ubuy2wron]

Carl you will be happy to know I drank deeply of the LVLT kool aide today and became a shareholder for the 1st time. By the way did anyone notice how miserable Prems largest investments are doing in the past dozen or so trading sessions. I think the cock roaches are back.

[txlaw]

Why? Is (maintenance ?) capex a lot less than depreciation?

 

Indeed it is.  That is the nature of LVLT's business.

 

Further, to quote John Malone:

"'Forget about earnings.  That's a priesthood of the accounting profession . . . What you're really after is appreciating assets.  You want to own as much of that asset as you can; then you want to finance it as efficiently as possible.'"

-Cable Cowboys

 

I would agree with Malone, at least with respect to a utility such as Level 3, which shelters economic earnings from tax through high capex and depreciation and actually earns high returns on incremental capital invested.

 

At some point in the next five years, LVLT will turn FCF positive, and then people will slowly start to get it. 

 

Stay the course, folks.  (And Carl, don't go apeshit on Crowe. ;D )

[Cardboard]

Cable had major growth in revenues. Level 3 doesn't.

 

So you could justify with cable that maintenance Capex was less than actual spending or that most of Capex was used to add new revenues. At Level 3, Capex continues to approach depreciation while there is no equivalent growth in revenues. To me, it seems like maintenance capex or that a lot of this $39 billion invested in properties needs a lot of upgrading every year.

 

I was hoping for pricing to improve or new revenues to show up, but what seems to be happening instead is that there is still way too much capacity out there and that some revenues disappear to be replaced by new ones while whatever money comes in via EBITDA is spent to pay $685 million in cash interest cost and whatever amount you like in maintenance capex and revenue survival capex.

 

Crowe is a good promoter, but numbers don't lie after so many years of the old same old.

 

Cardboard

 

 

[txlaw]

So you could justify with cable that maintenance Capex was less than actual spending or that most of Capex was used to add new revenues. At Level 3, Capex continues to approach depreciation while there is no equivalent growth in revenues. To me, it seems like maintenance capex or that a lot of this $39 billion invested in properties needs a lot of upgrading every year.

 

I was hoping for pricing to improve or new revenues to show up, but what seems to be happening instead is that there is still way too much capacity out there and that some revenues disappear to be replaced by new ones while whatever money comes in via EBITDA is spent to pay $685 million in cash interest cost and whatever amount you like in maintenance capex and revenue survival capex.

 

Not exactly true. 

 

The success based capex brings both new customers and potential customers online.  Many of these build-outs connect buildings and facilities to the LVLT network, even while those potential customers do not subscribe to LVLT services.  It's a bit like a newly constructed nat gas pipeline network, or even a newly constructed big box retail store, which gets increased throughput/volume in the new facilities over time.

 

Yes, some of the revenue growth from capital invested replaces revenue loss through secular shifts and churn.  But the net revenue growth, which translates to incremental gross margins of over 80% (!), results from the success based capex, and unless I'm doing the math incorrectly (which is possible), that translates into double digit returns on growth capex.  That is, of course, the reason why LVLT does not just use cash flow to pay down debt.  You would be crazy to do so, as long as you were not in a perilous state in terms of debt service.

 

I don't think overcapacity or pricing is the issue.  Instead, based on my cursory review of the press release, Europe (Global Crossing) appears to have had an effect on revenue growth.  But they still project adjusted EBITDA growth of 20 to 25 percent despite the economic headwinds.

 

The one thing I would worry about is growth in the CDN services going forward.

[fenris]

Short thesis: http://sumzero.com/news/95

 

[bmichaud]

You beat me to it - just read the Sum Zero short thesis and was going to post.

 

I'd love to see a point-by-point refutation by the longs...particularly interesting were Jim Crowe's incentive targets (utterly laughable) and the annual changes in revenue description by the Company.

[brker_guy]

It's Monday morning.  So, there is always some news coming out of LVLT, right? 

 

To the non-believers:

 

http://www.bloomberg.com/news/2012-07-30/level-3-communications-said-to-seek-1-4-billion-in-loans-1-.html?cmpid=yhoo

 

In the meantime, LVLT just booked another contract:

 

http://finance.yahoo.com/news/pbs-newshour-producer-macneil-lehrer-120000701.html

 

I am just glad that they DID NOT get involved with NBC and the Olympics this year.  What a bloody mess!!!!

[txlaw]

It's not worth taking the time to respond to such a piss poor short thesis. 

 

I'm going to go silent again on LVLT.  Given the attitude surrounding the company, I prefer to discuss in the background with board members who are more knowledgeable about the biz. 

 

The only reason I even posted was because Cardboard is a smart guy, but he seems to get a little frustrated by price action every now and then.

[SI]

Agreed Taxlaw.  Thought it was interesting that Sunit again caught the bottom of the mkt, again.

 

If you had been in a cave you have missed the continued Treasury sell off but the magnitude suprises when you see the yield on the 10-year of 1.78% is the highest since May, and up from 1.39% in 3 weeks.