Buying Opportunity
After Cisco’s (CSCO) outstanding results, we blogged that another way to play the huge growth in IP traffic was through pure IP service providers such as Level 3 (LVLT), Global Crossing (GLBC) and Time Warner Telecom (TWTC). That day, these stocks rallied big, especially Level 3.
Yesterday, Level 3 reported outstanding results but the stock gave back all the gains made on Wednesday. Why? The company said EBITDA would be down sequentially.
Use yesterday’s price weakness to get into this stock. Level 3 is going to spend a boat load of money in the first quarter to properly integrate the Broadwing and other companies it acquired during 2006. After that, operating results, along with the stock, should be off to the races again.
Sprint Nextel has been one disaster of a merger because it never bit the bullet and spent the money to properly integrate the two companies. Sprint, after years of poor performance, is finally going to do the ugly work. But it might be too late.
The strong underlying trends in Level 3’s business are too powerful to ignore. The core IP communications business is growing 25% to 30% per year, its growth rate and operating margins are the best in the industry and it continues to attract better and better customers–the who’s who of the Internet era. In addition, Level 3 will substantially improve the debt-to-EBITDA ratio by 2008.
Yesterday’s sell off was an overreaction. Use it as a buying opportunity.
February 9, 2007
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