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When Level 3 Communications (NYSE: LVLT ) prepared for this week's first-quarter report, I wondered whether the stock could keep crushing the market in 2012. As it turns out, it could -- Level 3's 36% gain before the report has turned into a 47% year-to-date boost today.
The results themselves were nothing special. A net loss of $0.66 per share was worse than the expected $0.60 of red ink, while $1.6 billion in revenues was just what Wall Street ordered.
But if you back out $0.29 of charges per share related to early retirement of debt papers, you get a much smaller net loss of just $0.37 per share. You could argue that the debt-payback costs really belong on the cash-flow statement under "financing activities," but Level 3 reaps tax-reducing benefits from having them on the income sheet. You could also argue that this so-called one-time charge will come up pretty often as Level 3 plans to reduce a crushing $8.5 billion debt load, in which case this was a miss rather than a beat.
So the bottom line looked better than expected. Unfortunately, management has promised to improve Level 3's cash flow generation and it's not happening yet. The company pulled in $189 million of operating cash and $41 million in free cash flows last quarter; This time, operations burned $75 million and free cash flow was a negative $213 million.
I'm not the only Debbie Downer raining on Level 3's parade this week. Analyst firm Canaccord Genuity reiterated a "hold" rating on the stock, complaining about weak cash flows and a scary risk-and-reward ratio. Analyst Greg Miller pointed out that Level 3 is banking on strong synergies from the integration of Global Crossing, but that the company has a terrible track record in squeezing results from ambitious acquisitions.
I want to like Level 3. I'm trying to see the bright side, but all I find are empty promises and piles of cash afire. Management just never gives me any reason to turn that frown upside down.
The company has massive fiber assets but can't figure out how to manage it profitably. Gun to my head, I would rather own networking rivals Verizon (NYSE: VZ ) or AT&T (NYSE: T ) , since both are profitable, pay generous dividends, and supplement their data networks with booming wireless sales. Level 3 can't match any of these attributes and remains a solid "sell" in my book. Learn more about AT&T's rock-solid cash flows and dividends in this free report, but hurry while it's still gratis.