BTIG has initiated coverage of Level 3 at a “Buy” rating, citing the service provider’s free cash flow and recurring revenue as attractive attributes.
At its current valuation following a sell-off resulting from “disappointing” second-quarter earnings, Level 3 is in a prime spot for investors looking to jump in.
“With speculative buyers likely now largely out of the stock, we believe the current valuation provides a compelling entry point into a recurring revenue, free cash flow generating telecom business,” wrote BTIG analyst Walter Piecyk in a research note. “As net debt falls over the next six-to-nine months, we expect the management team to either repurchase shares or make a strategic acquisition that can refresh margin expansion opportunities, thereby reigniting investor interest if the valuation alone is not compelling enough.”
As Level 3 potentially eyes up further acquisitions, the company has recently become an acquisition target itself. Last month, Level 3 was reportedly looking at “strategic options” and some analysts speculated that Comcast could be a potential suitor. As BTIG points out, the acquisition rumors caused Level 3’s stock to rally in the weeks leading up to its second-quarter report.
But since, analysts like Wells Fargo’s Jennifer Fritzsche have said that Level 3 in the near-term is more likely a buyer than a seller.
In its most recent quarter, Level 3 watched churn among its smaller enterprise customer base and wholesale customers eat into its revenues.
BTIG feels cable is making a much bigger impact on Level 3 than anticipated, luring away its low-end enterprise customers.
“We do not believe that the churn with low-end enterprise customers, which impacted the second quarter, is complete and are concerned that cable is having a greater competitive impact than many believe,” wrote Piecyk, noting that MSOs could continue investing in their networks as they look for other ways to grow market share.
BTIG is forecasting 1.5 percent sequential growth for Level 3’s CNS (core network services) enterprise business. In addition, the analyst firm predicts Level 3’s wholesale CNS business will continue to decline throughout 2016 and into 2017.
That said, BTIG still expects EBITDA margins will continue to expand in 2016 and 2017 as Level 3 realizes synergies from its TW Telecom and Global Crossing acquisitions.
- read this BTIG report (sub. req.)
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