Level 3 Becomes a Leveraged Sentiment Proxy (LVLT)

Level 3 Communications Inc. (NASDAQ: LVLT) is seeing shares under pressure today after its quarterly earnings report.  What is interesting is that nothing has really changed on the micro-level since the stock was much higher and after the open we were up almost 4% at $3.69.  But the negative market bias today is going to potentially change how Level 3 is viewed in the coming days and weeks as you will see in our additional earnings commentary and our own analysis below. 

The wholesale bandwidth communications provider posted -$0.08 EPS on a3% revenue rise to $1.09 Billion, which is better than the -$0.10 EPSand $1.07 to $1.08 Billion revenue estimates from First Call.

The company said Vvyx advertising distribution business was expected tocontribute approximately $10 million in Adjusted EBITDA and cash flowin the second half of 2008, and that unit sale recently contributed a$0.06 gain to make net EPS at -$0.02 (not comparable to estimates).

But the company noted that its 2008 business outlook for both CoreCommunications Services revenue and Consolidated Adjusted EBITDA isunchanged.  It also slightly raised guidance on 2008 Free Cash Flowtargets from break-even to positive for the remainder of the year.Perhaps one key issue is that its longer-term cap-ex is expected to be12% to 14% rather than the 11% to 12% goal for 2008.

There is a significant break between what the company was expected todo and how the stock is reacting.  Shares are down 9.2% at$3.23 on more than 50 million shares (at 2:30 PM EST).  The 52-week trading range is$1.68 to $5.88.

Frankly, this is setting itself up to look like a magnified market biastrade since it isn’t seeing any major change to business.  If sentimentis strong, we could see leveraged moves higher over the market.  If thebears end up dominating technology and communications stock, then it’sprobably time to expect more selling.

We sent our "10 STOCKS UNDER $10"weekly newsletter subscribers a heads up on this one Monday before theopen for a possible short squeeze alert. We had noted that Friday’s$2.92 close didn’t reflect a short squeeze and shares close up at $3.56yesterday ahead of the report.  Today is a give back, but it’s still up8% from last week’s close.

There are a couple of key levels here if you believe moving average andtechnical analysis applies to low priced stocks.  The 200-day movingaverage is $3.01 and the 50-day moving average is $3.33.  Share arestuck between those levels.  True technicians would say we are probablyabout two-weeks away from recognizing the next major price trend.

Jon C. Ogg
July 24, 2008