An Attractive Setup for Level 3
By Cody Willard
RealMoney.com Contributor
5/21/2007 3:31 PM EDT
URL: thestreet.com
Traders still pay a lot of attention to that Southwest-based carrier called Level 3 (LVLT) . The fact that we keep calling it a start-up, even though it has been a public company for more than a decade, underscores the long-idea setup in the name.
Carriers such as Level 3 sell services to other carriers to fill in gaps in their networks. Level 3 also sells to Internet service providers and other Internet companies, such as my RevolutioNetwork, that need transmission capacity.
Like all commodity businesses, selling transmission capacity is wildly profitable when the prices of the commodity rise. Naturally, it's not so profitable when the commodity prices fall. From roughly 2000 to 2005, pricing for transmission capacity was on the decline, and Level 3's stock followed suit, sliding some 99%.
But in 2005, things began to change. Some transmission routes started approaching total capacity. As a result, Level 3's pricing started to firm, and the company's stock rebounded. As essentially the only start-up carrier to survive the popping of the telecom bubble, the company's management team continued working to improve the balance sheet and avoid the possibility of bankruptcy. That goal was accomplished, and while the balance sheet remains loaded with debt, the company now has some breathing room for the first time in years.
Then and Now
I first met Jim Crowe, who founded and runs Level 3, back in 1998, when I was still at Oppenheimer. On a board, he listed all kinds of statistics about how Internet traffic would grow at a 100% annual clip forever and how Level 3 would make trillions of dollars or something along the way. Obviously, things didn't pan out quite as expected.
Today, you can order an investor kit from Level 3, and it will walk you through nearly the same line of thinking that Crowe laid out on that board nearly a decade ago. Of course today, unlike in 1998, practically no new fiber-optic networks are being built, vs. the hundreds that were constructed back in 1998.
Likewise, there's little focus on this sector right now, and it's one of the few places in this time of excess liquidity that still has some access-to-capital issues. Can you imagine going into an investment banker's office with a global fiber-optic-network model?
Little supply is coming on line, and demand continues to grow exponentially. That's a pretty good setup for a high-fixed-cost business like selling telecom services.
I already have a lot of exposure to the Internet video world, and I'm in no rush to add another name to my holdings. But I do expect to put a little Level 3 on the sheets and treat it much as I would a slightly in-the-money call option. According to its sticker price, it's priced more cheaply than my Google (GOOG) calls; that's for sure....." |
