Let me disclose this from the outset: I love the guys at
. CEO James Crowe is a visionary, and I love to listen to him expound on the future of telecom.
Crowe had a terrific vision when he founded this company. Level 3 isn't like so many of the other carriers that went public in the height of the anything-telecom mania: It had a real business plan and wasn't a bet on bad technologies.
But the real question remaining on Level 3 is whether it can achieve a level of positive cash flow before it runs out of cash. With no long-term guidance from management, there's no reason to gamble on this stock.
Crowe expected Internet protocol, or IP, to replace circuit-switched networks, and that the telecommunications-services industry would disaggregate. One company would dominate the long-haul industry, while others would own the access and other segments.
Level 3 wanted to be the big winner in the long-haul segment, so its business plan called for the laying of multiple conduits, which are basically pipes through which fiber-optic cable is pulled. Compared with laying a single conduit, laying multiple ones tacks on very little incremental cost. That would enable the company to continuously upgrade to the very latest and best fiber-optic cabling.
If Level 3 makes it to cash-flow-positive paradise, this multiple-conduit design will pay huge dividends, as most of its competitors will face much higher costs to upgrade their existing networks. But in the meantime, this strategy has actually hurt the company, as it began pulling new generations of fiber through the conduits before the older-generation fiber had been fully utilized, thus using up now-precious capital.
Cash-flow nirvana segues nicely to the real crux of the Level 3 debacle: There's just
way to tell if Level 3 is going to make it there. The company has completely declined to offer any long-term guidance.
Say what? Every investor who owns this stock is making a
bet here. I understand that the current economic conditions make such a forecast difficult, but tough! Why would you buy this stock if there's no long-term guidance? The answer is, you don't.
Looking for Clarity
Crowe remarked several times during Level 3's late-October quarterly conference call that "the company remains on track to reach cash-flow positive, even if market activity remains at today's depressed levels." Well, he also thought the last business plan -- before its recent major strategic overhaul and cutting of expenses and headcount -- was fully funded to cash-flow positive. It wasn't. The fact that the company is using cash to buy back debt indicates that management really does believe it can get to cash-flow positive. The flip side is that by doing so, it has a smaller cushion to get there.
Two other questions I know I'll receive after this column:
- What about
Global Crossing (GX) ? Don't even think about it. Its balance sheet dictates that the company will almost surely have to reorganize. If it does, it's going to be quite painful for the shareholders left holding the bag. This company makes Level 3 look safe!
What about the
Dynegy (DYN) and
Enron (ENE) as a new threat to Level 3? Nope. No matter what strategy the combined companies take on their telco division, it won't significantly affect Level 3. Just not a factor.
So what's an investor to do about Level 3? As far as the stock is concerned, wait. If this company is going to make it, it's going to make it big. I mean,
. Put it this way, the two or three points we've missed as the stock has risen from $2 to $5 will mean nothing if this company actually delivers on Crowe's vision.
It's sitting here with a $2.5 billion market cap. If Level 3's still here in five years, that market cap's gonna be much bigger, and we'll have ample time to enter the stock -- when we've got some real,
certainty that this company will be around. In the meantime, there's too much risk in this stock. Go buy the bonds or simply stay away.
Cody Willard is president of TelEconomics Consulting, a financial and technology consulting firm. He is also founder of
TelEconomics.com, a Web site devoted to news and analysis of telecommunications stocks. Previously, he was senior analyst for a venture development company, and before that was a partner at the Lanyi Research division of CIBC World Markets. At time of publication, Willard had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Willard appreciates your feedback and invites you to send it to