Level 3 Raises Its Game

A wave of telco consolidation has names like Level 3 (LVLT Quote) and Broadwing (BWNG Quote) rocking.

Now that big Internet operator MCI is a part of Verizon (VZ Quote), and SBC became AT&T (T Quote), the largest U.S. phone company, the companies that remain standing have attracted unusual investor interest this year.

Qwest (Q Quote), which teetered on the brink of bankruptcy in 2002, is up 20% this year. Undersea phone-cable operator Global Crossing (GLBC Quote), 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 Quote), 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.