Level 3 Guidance Sends Short Sellers Covering (LVLT)

Level 3 Communications (NASDAQ: LVLT) is out with earnings, and the short sellers are getting out of the way.  The company posted -$0.12 EPS on $1.09 Billion in revenues, while First Call estimates were -$0.11 EPS and $1.06 Billion in revenues.

James Crowe, CEO, has noted that telecom strength has helped in the last several quarters and that core communications services pricing continues to be positive.  The company has also substantially increased available installation capacity. 

Level 3 has also reaffirmed its two primary goals for 2008.  The first is to reach free cash flow breakeven on a run rate basis during 2008, and the second is to increase sales and installations to rates that match customer demand for services.  More specifically, the company noted that performance has exceeded earlier expectations and it expects to be "free cash flow breakeven" for the remaining three quarters of this year.  Deferred communications revenue decreased slightly to $918 million at the end of Q1-2008, compared to $939 million in Q1-2007 and $929 million in Q42007.

This is key for Level 3 in our opinion.  With a long-term debt of $6.831 Billion and cash and short-term securities of $568 million (including $8M restricted), their ability to remain cash flow breakeven is acceptable.  We have just covered Level 3 in our weekly "10 Stocks Under $10" as one that we expect some longer-term recapitalization as part of that debt starts to come closer to maturity, but on a short term basis we expected a short-covering rally into earnings.  That last short interest was massive at 243.9 million shares.

Shares are up over 10% at $2.62 in pre-market trading this morning, and the 52-week trading range is $1.68 to $6.42.

Jon C. Ogg
April 23, 2008

Jon Ogg is a producer of and editor for both the Special Situations newsletter and the "10 Stocks Under $10" weekly newsletter for a673b.bigscoots-temp.com; he can be reached at [email protected] and he does not own securities in the companies he covers.