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Blu-Ray's Death Helps LVLT?

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By DCWD40
January 7, 2009

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The Gray Lady's technology section has an interesting story on Blu-Ray. Just when you thought Blu-Ray had a clear path to the winners' circle, it just might be headed for the technology obsolescence.

This story made me think about Cramer's speculative stock of 2007 selection -- Level 3. It was selling for around $6 then. It weighs in at a much lighter $0.93 a share today. Is it a buy?

Some may remember Level 3 from the dot-com bubble days of 2000 when LVLT was in the $120 a share range. Level 3 was going to provide the pipelines for the Internet superhighway that was headed to every home and business center.

So, what went wrong with LVLT? Well there is $6.8 billion in debt for a company with just $4.4 billion in sales. That isn't quite the debt level of Six Flags ($1.0 billion in revenue and $2.1 billion in debt) but LVLT's stock's fall looks similar to the $40 in 1999 to $0.32 today fall in Six Flag. So, for openers, LVLT has massive debt weighing down its stock.

LVLT is trying to extend its debt due dates from 2009 and 2010 to 2013. For those willing to take this leap of faith, the interest rate being offered is 15%. Needless to say, this rate is not anywhere close to Treasury yields and it reflect that this is distressed debt.

Not only is the debt massive, the interest rate high, and some debt coming due too quickly, but S&P just lowered the company's debt rating to "selective default." This isn't a pretty picture...

Then there are the annual losses. 2009 is not expected to buck the trend although the losses have been getting smaller. The 12 analysts making projections for 2009 expect a loss of between $.22 and $.32 a share. So, in a time of economic concern and tight credit, this stock has a big debt and a business that loses money. What a combo and it doesn't come with fries (although it almost sells for as much as a small fry at McDonald's).

http://finance.yahoo.com/q/ae?s=LVLT
http://www.zimbio.com/McDonalds+French+Fries

There is just one more problem to mention before trying to look over the hill. There is competition from the likes of T, S, and VZ to name just a few (and limiting myself to giant companies).

So, does Blu-ray need to go away before LVLT can make a buck? Probably. The promise of LVLT was that video was going to light up all the fiber optic fiber cable ever installed. But, LVLT hurt its image in 2007 when it had trouble filling orders. That didn't help the company then or now sell capacity into a market with fiber to spare.

If there was ever of shortage of fiber capacity (something Cramer thought might happen if video was big), LVLT would certainly benefit. But, that story isn't being played out today. Reality for LVLT is that last quarter's sales were flat. That's hardly a good sign.

The company's outlook is rated by analysts as cautious. The stock's move up from $0.57 to today's $0.92 looks good -- for those who guessed correctly. But, based on fundamentals, this is one company with the potential to go all the way to zero. But, for contrarians, this is a company with debt S&P rates as toxic. If they can't get triple-A right, who knows if they can get the other end right.

At least that is how I see it...

W.D.