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This Telecom Stock Is Still the Worst of Its Breed

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Three months ago, Level 3 Communications (Nasdaq: LVLT  ) reported a decent first quarter. At the time, I told you to keep a lid on your enthusiasm for the stock because there were plenty of red flags hiding under the shiny veneer.

Today, Level 3's shares plunged 11% on disappointing second-quarter results. The stock has lost 29% of its value since that dire warning in early May. It's not always fun to be right.

Total revenue of $1.6 billion was just $1 million above the year-ago period. Level 3 managed to cut its bottom-line losses from $0.97 per share to $0.29 per share, but analysts were looking for an even smaller bucket of red ink.

The flat sales included 5% higher American revenues but also significant weakness in Europe and Latin America. In particular, orders from the U.K. government dwindled by 26% year over year.

But the worst warning sign on display here is the weak grip Level 3 has on its cash flows. In the second quarter, the company generated just $3 million of free cash flows, down from $19 million a year earlier. Neither figure is particularly impressive for a business with billion-dollar revenues, and it's a long-term trend that isn't going away:

LVLT Free Cash Flow TTM Chart

LVLT Free Cash Flow TTM data by YCharts

Mind you, that chart starts after the 2008 financial crisis. You'd expect a healthy service business to grow healthier as consumer, government, and enterprise spending ramp up in the aftermath of that crash, but Level 3 is doing the exact opposite. I still don't see any sign that management is up to the turnaround task at hand.

And for all of this execution risk, you don't even get a dividend bonus. AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) both combine Level 3-style networking scale with financial stability and decent dividend payouts. Or you can rely on CenturyLink (NYSE: CTL  ) and Windstream (Nasdaq: WIN  ) to pair even fatter yields with some growth potential.

Either way, I can't think of an investment thesis that would lead me to Level 3 today when there are so many better choices on the market. My bearish CAPScall on Level 3 soared today, and I expect more of the same in coming quarters.

To get started on a better telecom portfolio, learn more about AT&T's rock-solid cash flows and dividends in this free report, but hurry while it's still gratis.

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.

We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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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 July 25, 2012, at 5:15 PM, prginww wrote:

    Article scared me for a sec when I saw it in my stock market app that it was about windstreams drop this evening. Phew, though still waiting on an article on windstream today.

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