A Week of Responses II
April 22, 2009
The second installment of responses to readers:
In response to “Sorry Level 3–You’re Damned if You Do…and You’re Damned if You Don’t” and “Sorry Level 3–You’re Damned if You Do…and You’re Damned if You Don’t Part 2″:
Dave,
Does anyone know what these class action law suits about? How does it affect L3? I do believe the market is punishing L3 unfairly. Turn around may take some time as the economy is bad. But I guess if they do what they promised (cutting capEx, increase cash flow) , they will be able to sustain through this bad economy and come out big, when economy turns around.
––Lawrence
Lawrence,
Any body can find a lawyer in this country at any time and try to game the system for some cash. I don’t see any criminal charges being bantered about, just another shakedown for cash.
–Dave
Telecom Straight Shooter,
Mr. Rusin is of course right in everything he says here. But when will the market reward Level3?
–Herbert
Herbert,
My wife does not think I am always right … the market for the most part is a bunch of lemmings. You want 10x EBITDA — just wait, all boats will rise. Level 3 was brilliant in scooping up the metro assets — this is where the growth and competitive advantage will; come from. I am not a psychic CEO – when will this pay out? No idea. But I have been called the Psycho CEO …
–Dave
Dave,
Impossible to reward a company not sustainable in the long term. Stock market is overall a measurement of confidence. And L3 has lost all confidence from the Wise Men after so many years of promising the moon. That’s why independently of what L3 does, they are punished. Well, the real punish people are those that bought L3 shares at 3-6-9 $. The CEO must sell the company quickly before it goes really bad. You cannot compete in the wholesale telco market without investment.
–John
John,
Just look at what is really going on with Wall Street. My opinion, Wall Street is a fixed game – it has less to do about confidence and more about a small subset of well healed getting richer. It is an insiders game.
–Dave
Dave,
Wall Street’s 250 mil sh short position in LVLT has dropped to 150 mil over the last 3 or 4 mo . As soon as that short position is gone, the Wall St ***agenda*** is gone . The brokerage houses,analysts,mkt makers & financial press , will suddenly see the light . The overblown complaints about substantial debt will subside . This is a ***CAPITAL INTENSIVE INDUSTRY*** & debt is a virtual necessity . The key is the ability to service that debt & as LVLT is about to prove , they can service that debt with substantial cash to spare . These same naysayers will be knocking down the doors to earn investment banking fees by refinancing or raising new money for LVLT .Full disclosure—- i am very long LVLT & follow it on a daily basis .With no offense to the blogger—-LVLT has the best management in telecom—–they have proved it by coming through the telecom depression of 2001 -2004 without a restructuring . Their current financial position has never been better . They have 768 mil in the bank to pay off 700 mil over the next 2 yrs . My guess is they will be F/C/F positive about 200 mil for 09 [ Q1 will be negative due to working capital needs which reverse as the yr goes forward] . PS: Mason Hawkins & Prem Watsa own about 48% of the cos stock .
–Morty
Morty,
This is not a stock blog. Level 3 made the right move by sucking up a bunch of metro assets two years ago — it is just now starting to pay off for them. Last I checked, no private investors are pouring oodles of cash into fiber builds since the crash of 2001-2003. There is a shortage of supply of metro and access networks. Level 3 always has an interesting story every quarter on “what’s coming” next over the years — I would like to see them a little more focused on the here and now and not what’s coming. That said, if the analysts and Board allow it, they are meeting the covenants – why throw stones. The metro move will prove historically smart and savvy as bandwidth demand continues to grow.
–Dave
Written by Dave Rusin - Telecom Executive
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The only reason LVLT is cash flow positive is that the company was forced to cut CapEx because of reduced growth opportunities as a result of the poor economy. Assuming the economy eventually recovers in 2010-2011, CapEx will explode back up and free cash flow will evaporate. LVLT has traditionally sold at a premium valuation of EBITDA, but unfortunately the growth that supposedly justified it never materialized. Every time the company finds a new growth area, another area of the business starts shrinking. I certainly see no reason LVLT should ever sell at a premium. With its terrible balance sheet relative to peers it should probably sell at a discount. Valuable Metro assets or not, this company is going to have to continue diluting existing shareholders into oblivion to finance any expansion because it’s model is capital intensive but it doesn’t throw off any capital.