Can Level 3 Keep Crushing the Market?

Level 3 Communications (Nasdaq: LVLT  ) is soaring in 2012. Shares of the long-distance networking and content delivery specialist have gained 36% this year, leaving the broader market and rivals of every stripe firmly in the dust.

But content delivery competitor Akamai Technologies (Nasdaq: AKAM  ) took a dive last week on a disappointing next-quarter outlook. Will Level 3 send similar signals in Wednesday night's first-quarter report?

The word on the Street
Wall Street analysts sure took Akamai's soft guidance as a bad sign for Level 3. Over the last 30 days, the consensus earnings estimate has fallen from a $0.51 net loss per share to a deeper $0.60 hit. However, even the redder pen paints a brighter picture than the year-ago quarter's $1.80 loss per share.

Sales are expected to jump 71% year over year to $1.6 billion. Before you break out the bubbly to celebrate, remember that Level 3 bought networking rival Global Crossing last year, making a direct comparison pretty useless. For what it's worth, Level 3's stand-alone sales grew 3% year over year in the last quarter while Global Crossing's revenue shrank 4%. The combined sales fell 1%.

Fellow Fool Tim Beyers is troubled by Level 3's weak grip on cash flows, and I can see why:

LVLT Free Cash Flow TTM Chart

LVLT Free Cash Flow TTM data by YCharts

You can interpret negative earnings as a successful tax-evasion ploy, but burning cash still smells like a forest fire. Now, management did promise on the last earnings call that "our ability to generate free cash flow should improve markedly over the next four to six quarters." Then again, the same people said last summer that the last three quarters of 2011 should break even in terms of free cash, and the chart above shows how that promise worked out.

Will Level 3 follow Akamai?
All that negative stuff aside, you should know that Akamai is a poor proxy for Level 3. Content delivery is Akamai's bread and butter, but only 1.6% of Level 3's core networking sales last quarter. The segment is growing like wildfire, but even with doubled sales year by year it'll take a while to move the needle.

The big telecoms don't work well either, being tethered to the rapidly changing wireless communications market. But regional telecoms CenturyLink (NYSE: CTL  ) and Frontier Communications (NYSE: FTR  ) might work better. Like Level 3, they service huge stretches of wired long-range networks with similar expense profiles and low-octane revenue growth.

Level 3 doesn't look good in that company. Both CenturyLink and Frontier are profitable while Level 3 is not. To rub salt in the wounds, Level 3 doesn't -- read: can't afford to --pay a dividend while CenturyLink serves up a tasty 7.5% yield and Frontier's payout ratio hits double digits at 10%.

I recently showed you how Level 3 divides investors into one camp of turnaround-sniffing fans and another full of pessimists who can't stand negative cash flows. That's also where I started my bearish CAPScall on the stock, because I don't see the company delivering on its promises. Management gets their turn to prove me wrong on Wednesday, but I remain a skeptic. The real turnaround experts are investing in a totally different sector these days.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool has a disclosure policy.

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