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2012 Preview: Level 3 Communications

With 2011 finally in the books, it's time to reflect on what has transpired this past year and which companies could be facing business-altering decisions in 2012. On today's plate we have telecommunications services provider Level 3 Communications (NYSE: LVLT  ) .

But before we dig too deeply into what 2012 may have to offer, let's get a quick snapshot of how 2011 treated shareholders:

2011 Stock Return 15.6%
Price-to-Earnings (TTM) NM
Price-to-Sales (TTM) 0.9
Cash/Debt $0.46B / $7.78B
Projected 5-Year Growth Rate 3.3%
Forward P/E NM

Source: Yahoo! Finance. B = billions. TTM = trailing 12 months. NM = not meaningful.

Level 3 shareholders endured a wild ride in 2011, with the stock at one point more than doubling from its 52-week lows only to completely reverse course and end the year just 15.6% higher than where it began -- although this is still a success by all measures, with the S&P 500 flat for 2011. But these results are now in the past. Let's look ahead and see what could be driving Level 3's stock price in 2012.

What to expect
The biggest question mark hovering over Level 3 heading into 2012 is how well the company can integrate its purchase of Global Crossing, which closed last year. If you recall, Global Crossing declared bankruptcy in 2002, and prior to its agreed buyout was likely worrying many of its shareholders with the possibility of another bankruptcy given its inability to turn a profit. Much like Bank of America purchasing Countrywide Financial, my concern revolves around whether Level 3 can take a business that has continuously lost money and turn it around, or if it will become a toxic drag on Level 3's results much like Countrywide has become to Bank of America.

An overall sector slowdown is also something worth keeping an eye on. In 2011 Akamai Technologies (Nasdaq: AKAM  ) lost its cloak of invincibility and Limelight Networks (Nasdaq: LLNW  ) stumbled dramatically. Factoring in a very unpopular 1-for-15 reverse split enacted in 2011, Level 3 is staring down some very large expected losses in 2012 according to analyst estimates. With operating results consistently worse than expectations in the past three quarters, shareholders could be in for more disappointments in 2012.

Finally, it all comes down to debt and cash flow. AT&T (NYSE: T  ) offers similar services on a grander scale than Level 3 and boasts significantly more debt, but it has the cash flow to support its borrowing. With its cash flow being decisively negative, and the company adding even more debt to its balance sheet last year, I have to begin wondering if Level 3 will ever be able to turn things around.

Foolish roundup
I really would like to think this could be the year that Level 3 rewards its shareholders, but it's looking more and more like it'll be another year of significant losses and integration issues. If the company can't get its costs (and its debt) under control, there's just not much hope for the long term. With that said, I'm going to maintain my underperform rating on CAPS until I see more concrete steps toward profitability.

What are your thoughts on Level 3 heading into 2012? Share them in the comments section below and consider adding Level 3 Communications to your free and personalized watchlist to keep track of the latest news with the company.

Also, if you're looking for one more great idea heading into the new year, consider downloading a copy of our latest special report, "The Next Trillion-Dollar Revolution," in which our top-notch team of tech analysts highlights a company revolutionizing the tech space.

Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that has its readers' best interests on speed dial.

Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 03, 2012, at 4:07 PM, prginww wrote:

    LVLT is one of my positions that I HATE to LOVE. This cdn is a powerful play if the company could pull its head from the proverbial rearend. Management is great, but cannot seem to put the profits together. I think this is going to be the last year I hold on to them,. I will see what kind of money I can pull out of the options side, before I sell this one for a loss and take the tas write off next year :(

  • Report this Comment On January 03, 2012, at 4:18 PM, prginww wrote:

    Seems you should spend a little more time editing your Blog before posting. You state that Level 3 had a rough ride in 2012. I think 2012 is now officially one day in the books.

  • Report this Comment On January 03, 2012, at 4:35 PM, prginww wrote:

    you keep on proving that you are a FOOL. your ideas and predictions are wrong. Do you have any degree in the subject that you are writing about ?

  • Report this Comment On January 04, 2012, at 12:32 PM, prginww wrote:

    In this ‘analysis’, I don’t find much analytic information. It’s more generalities and speculation than specifics.

    Also, to validate his assertion that Akamai “lost its cloak of invincibility” in 2011, Sean cites a February 2011 commentary by Tim Beyers, who sold out his AKAM not long before Akamai announced it was acquiring Cotendo. Sean, why didn’t you mention that Cotendo purchase . . . which restores some of Akamai’s “cloak of invincibility”?

    I also question philippalmer’s comment that Level 3’s “Management is great, but cannot seem to put the profits together.” Philip, isn’t that an oxymoron?

  • Report this Comment On January 04, 2012, at 4:52 PM, prginww wrote:

    good news bad news...

    good news is that global crossing wasn't as incompetent as you suggest and bad news is level 3 isn't as competent as you think. (unfortunately, neither executive team is/was too impressive)

    essentially this merger combined combined two poorly run companies with some decent assets

    in short, level 3 has massive debt burden, is integrationally-challenged (as evidenced by previous mergers) (that's not a race comment), is hierarchically obsessed and is frivolous in its capital spending

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