Networking giant Level 3 Communications (Nasdaq: LVLT) has been taking a beating in the market recently. As of Thursday night, share prices had swooned more than 25% from highs set in March. A drastic jump on surprising first-quarter results proved short-lived, just as yours truly expected. The next report, two weeks ago, didn't give Level 3 investors much to cheer about.
But the stock was always popular with the analyst crowd, scoring plenty of buy ratings and no sell calls. And on Friday, the stock jumped as much as 9.5% on the news that another Wall Street heavyweight likes the company's prospects.
Goldman Sachs opened coverage of Level 3 with a buy rating (don't you love that "new car" smell?) and a $30 price target, about 50% above Thursday's closing price.
The firm likes where Level 3's bet-the-farm merger with Global Crossing is taking the two-headed beast. According to the research note, that deal "improved [Level 3's] balance sheet and places the company on a path to sustainable [free cash flows] for the first time in its history." Goldman sees an "inflection point" drawing closer, and wants to capitalize on that singular event.
Support from a Wall Street slugger of Goldman's caliber sure is market-moving news. However, I can't say that I agree with this analysis.
Looking at the same second-quarter report that triggered Goldman's burst of enthusiasm, I reached the opposite conclusion: Level 3's cash flows are growing weaker and not stronger, and certainly don't seem destined to become sustainable any time soon.
Investing in Level 3 today is a risky turnaround bet with a highly uncertain payoff. Moreover, the typical troubled telecom at least pays out generous dividends to make its risky bets worth your while: Witness Frontier Communications (NYSE: FTR) and CenturyLink (NYSE: CTL) buttressing their buyout-based improvement plans with fantastic dividends, for example.
But with negative cash flows, Level 3 simply can't afford to take that route. And unlike Goldman, I don't see that sorry situation changing for the foreseeable future.
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