Copyright 2006 TheStreet.com, Inc.
TheStreet.com
March 23, 2006 Thursday 2:57 PM Eastern Time
By Scott Moritz, Senior Writer
From Lexis Nexis
A wave of telco consolidation has names like Level 3 (LVLT:Nasdaq) and Broadwing (BWNG:Nasdaq) rocking.
Now that big Internet operator MCI is a part of Verizon (VZ:NYSE), and SBC became AT&T (T:NYSE), the largest U.S. phone company, the companies that remain standing have attracted unusual investor interest this year.
Qwest (Q:NYSE), which teetered on the brink of bankruptcy in 2002, is up 20% this year. Undersea phone-cable operator Global Crossing (GLBC:Nasdaq), which emerged from Chapter 11 in 2004, is up 50% since the beginning of the year. And Broadwing, the long-distance spinoff of Cincinnati Bell (CBB:NYSE), is up 130% since Jan. 1.
Amid all the hoopla surrounding the survivors of the big telecom collapse at the turn of the century, national data network shop Level 3 got a huge upgrade to buy from sell from Bear Stearns Thursday. The bullish call sent Level 3 shares up 15%.
“This could be the best call this year,” says one hedge fund manager who is long Level 3.
The focus of optimism for Bear Stearns analysts Steve Randall and Mike McCormack is the notion that the free-fall in calling prices may slow as AT&T and Verizon take time off from price wars to work on integration.
“In 2006, we expect price declines to continue to moderate while traffic volumes increase, with the potential to accelerate in 2007 and beyond as the Internet is increasingly used to transport voice, data and video,” the analysts say in their note Thursday.
While fans like the chances of more traffic going to Level 3’s massive broadband network, the company’s heavy debt, staggering losses and makeshift business plan helped turn Wall Street away from the stock.
Level 3 sits on a vast network of fiber optic cable that it either strung along its rights-of-way or acquired through takeovers. But the company also owes $6 billion in debt and racked up $687 million in net losses over the past 12 months.
In 2002, to avoid a default with lenders, Level 3 bought two software reselling companies, which offered big revenue to satisfy credit agreements, but contributes little to the bottom line. The move was seen as an act of desperation, hardly an endorsement of its broadband network opportunity.
Level 3 has steered clear of Wall Street except when it needed more financing, and the stock has traded below $4 for the past two years. But the Bear upgrade Thursday took the stock to $4.11 at one point, a two-year high.
Curiously, Bear’s analysts spy a change in the company’s aversion to stock investors and a potential to spark some interest ahead. “The company is hosting an analyst day for the first time in five years, which could provide a near-term catalyst for the shares, in our view,” say Bear’s analysts.
But for all its flaws, some bulls still see Level 3 simply as one of the few Internet-based telcos that remain standing.
“I think it’s the best way to play an increasingly stable pricing environment with fewer players to capitalize on data growth,” says the hedge fund investor.