Will Level 3 Communications See a Recovery?

With shares of Level 3 Communications (NYSE:LVLT) trading around $22, 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 is a facilities-based provider of a range of integrated communications services. It has created its communications network by constructing its own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. Level 3 Communications provides communications services to a range of wholesale and enterprise customers. Wholesale customers may use its services as a component in their own offering of telecommunications services to their customers while Enterprise customers use its services for their own needs. Consumers and companies worldwide are look to communicate more than ever and as efficiently as possible. As communications technology advances and is adopted at increasing rates, look for companies like Level 3 Communications to see rising profits.

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T = Technicals on the Stock Chart are Mixed

Level 3 Communications stock has done relatively well over the last several years. The stock has just about tripled since Financial Crisis lows but is now part of a range extending back to last year. 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 around its key averages which signal neutral to 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

36.82%

23%

22%

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

Put IV Skew

Call IV Skew

June Options

Steep

Average

July 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 minimal 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?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

45.45%

67.69%

56.57%

81.76%

Revenue Growth (Y-O-Y)

-0.57%

2.22%

71.52%

73.71%

Earnings Reaction

0.88%

-13.58%

-1.16%

-9.69%

Level 3 Communications has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been mostly disappointed 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, AT&T (NYSE:T), Verizon (NYSE:VZ), CenturyLink (NYSE:CTL), and sector?

Level 3 Communications

AT&T

Verizon

CenturyLink

Sector

Year-to-Date Return

-5.67%

6.11%

14.35%

-9.64%

5.13%

Level 3 Communications has been a relatively poor performer, year-to-date.

Conclusion

Level 3 Communications provides essential communications products and services to growing companies and consumers across the globe. The stock has tripled over the last few years but seems to be stuck in a range extending back to last year. Over the last four quarters, earnings and revenue figures have improved but not as much as investors have expected. Relative to its peers and sector, Level 3 Communications has been a poor performer year-to-date. WAIT AND SEE what Level 3 Communications does this coming quarter.

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