Level 3 Communications (NASDAQ: LVLT) is one of the most widely traded and widely shorted stocks of any listed on a U.S. exchange. Average daily volume in the shares is over 41 million, and shares sold short as of mid-December were over 167 million. That is tops of all companies listed on the Nasdaq.
Level 3 would appear to be in a good business. It has 50,000 miles of IP backbone to transport voice, data, and video. It provides services to the country's largest cable and telecom companies.
Level 3 has taken a beating in 2007 falling form $6.80 to just above $3. Wall Street has to wonder how it gets back toward $7.
For starters, the company has to stop making an acquisition a month. The company's Level 3's latest 10-Q lists seven deals. It is not unfair for Wall Street to be concerned about the pace of these purchases, especially since Level 3 does not make money. In the September quarter, the company had an operating loss of $53 million on revenue of $1.061 billion. Level 3 also made $138 million in interest payments on its $6.8 billion in long-term debt.
The company has one large asset it could sell and that may have some real value. It has a content delivery business not unlike that of Akamai (NASDAQ: AKAM). In the last quarter, it brought in about 10% of the company's revenue. A sale of the unit could be used to reduce debt. The value of the business has a much higher multiple than Level 3 itself. LVLT has a sales to market cap ratio of .6x. Akamai's is 20x. Even with an adjustment for Level 3's debt, that is a very big difference. Even at 10x multiple of revenue, the content delivery operation could be worth $1 billion.
Level 3 is going to have to show investors that its M&A days are behind it and that it is willing to focus on the business of charging for use of its broadband "pipe." Being in other lines of work only hurts the shares.
Douglas A. McIntyre is an editor at 247wallst.com.
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