What Do These Factors Say About Level 3 Communications?

With shares of Level 3 Communications (NASDAQ:LVLT) trading around $20, is LVLT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Level 3 Communications together with its subsidiaries, operates as a facilities-based provider of a range of integrated communications services primarily in North America, Latin America, and Europe. The company provides core network services as well as related professional services, colocation and data center services. It also offers Internet protocol and data services comprising high speed Internet, dedicated Internet access, virtual private network, content delivery network, media delivery, and security services, local and enterprise voice services, and collaboration services. In addition, the company provides wholesale voice services and other communications services. It primarily serves enterprises, multinational customers, portals and large search enterprises, regional service providers, and systems integrators. Level 3 Communications is able to provide the infrastructure to a world that is growing eager to become more connected.

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T = Technicals on the Stock Chart are Weak

Level 3 Communications stock has seen increased selling in its stock since reaching highs during the technology boom. The stock bounced off of lows during the Financial Crisis and has trending higher since then. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Level 3 Communications is trading below its key averages which signal neutral to bearish price action in the near-term.

LVLT

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Level 3 Communications options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Level 3 Communications Options

44.76%

76%

75%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion…

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Level 3 Communications’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Level 3 Communications look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

26.47%

56.57%

81.76%

63.93%

Revenue Growth (Y-O-Y)

2.22%

71.52%

73.71%

73.52%

Earnings Reaction

-13.58%

-1.16%

-9.69%

5.07%

Level 3 Communications has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have not been pleased with Level 3 Communications’s recent earnings announcements.

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P = Poor Relative Performance Versus Peers and Sector

How has Level 3 Communications stock done relative to its peers, CenturyLink (NYSE:CTL), Verizon (NYSE:VZ), AT&T (NYSE:T), and sector?

Level 3 Communications

CenturyLink

Verizon

AT&T

Sector

Year-to-Date Return

-11.16%

-3.49%

20.41%

15.14%

13.60%

Level 3 Communications has been a relative underperformer, year-to-date.

Conclusion

Level 3 Communications provides products and services that fulfill the requirement and desire of consumers and businesses to connect among each other. The stock has not well over the last several years as any reasonable pop has been met with increased selling. Currently, the stock has consistently trended higher since establishing lows during the Financial Crisis. Earnings and revenue growth figures have been improving but not at a pace that investors are expecting. Relative to its peers and sector, Level 3 Communications has trailed significantly in year-to-date performance. STAY AWAY from Level 3 Communications for now.

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