- Future S&P returns not as enticing as past periods.
- Examples using Shiller data to project earnings growth over a 5 and 10 year range.
- Going forward a heavier weighting of dividend stocks could be a safer alternative to stocks with no dividend.
A few months back I wrote an article titled “A Unique Way To Use The Shiller PE As A Market Indicator“. To summarize the article for those that did not read it, although I’d suggest clicking the link above if you haven’t, were the following bullet points:
- Shiller PE as an indicator is useful to specific time frames.
- Using a single Shiller PE average or median over long periods is a poor indicator.
- A rolling 25 year time frame yields useful results.
An updated graph through March is:
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The 1Q-2015 Newsletter can be viewed here.
Level 3 Communications (NYSE:LVLT) is a global communications provider headquartered in Broomfield, Colorado, that provides communications services to enterprise, government and carrier customers in more than 60 countries around the world. Level 3 operates one of the world’s largest Internet backbones. LVLT and tw telecom (NASDAQ:TWTC) stockholders approved the acquisition of TWTC by LVLT on October 28, 2014. Level 3 reported fourth quarter 2014 results on Wednesday, Feb 4, 2015. This article is an update to our last article, “Level 3 Communications: A Long Idea At An Attractive Value” which is an in depth look at the company. We discussed the following topics in the last article and this article will update the topics as indicated below and not repeat ourselves for the topics we haven’t changed our view on:
- Management Change – UNCHANGED
- TWTC Acquisition – UNCHANGED
- Financials (Pro-Forma) -UPDATED
- Growth outlook (Pro-Forma) -UPDATED
- Valuation (Pro-Forma) -UPDATED
- Debt (Pro-Forma) -UPDATED
- NOL’s ) -UPDATED
- Competition – UNCHANGED
- Open tax issues – UNCHANGED
- Final thoughts -UPDATED
These numbers will differ from what LVLT reported in the earnings release. Why? These are complete pro-forma numbers. LVLT reported consolidated results which only included two months of TWTC results not the full quarter and the earnings release focused more on LVLT stand-alone results.
Top line growth is critical for the combined company and the core Enterprise business continues to show traction:
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The 4Q-2014 Newsletter can be viewed here.
First let me say general market indicators are no substitute for analyzing individual securities although the difficulty in finding bargains increases as market indicators trend toward extreme overvaluations. You should always update your analysis on stock holdings to ensure they are not following any euphoria into overvalued territory; of course you should always update your analysis periodically regardless of market indicators.
I’ve seen various prognostications of how the market is extremely overvalued when compared to the historical Shiller PE. Long term averages, depending on who you are talking to, hovers around 17. Using any metric measuring historical PE’s over a very long period is a useless exercise. Why? Advances in technology especially with the advent of the internet access revolutionized trading allowing easy access to information and trading for all investors, resulting in more participation both in the USA and around the world. Applying Shiller PE’s of the early 1900’s to today be like an apple to oranges comparison which will become obvious in the examples to follow.
Ok so what is an appropriate time period? This is open for debate but the period of time for this article is based on a rolling 25 year window from the current date or the date in question. Medians are calculated over various intervals and compared to the historical Shiller PE. The first example is for current time period:
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Level 3 Communications (NYSE:LVLT) is a global communications provider headquartered in Broomfield, Colorado, that provides communications services to enterprise, government and carrier customers in more than 60 countries around the world. Level 3 operates one of the world’s largest Internet backbones.
LVLT and tw telecom (NASDAQ:TWTC) stockholders approved the acquisition of TWTC by LVLT on October 28, 2014. LVLT will report third quarter 2014 results on Wednesday, Nov 5, 2014 and plans to discuss third quarter results for both Level 3 and tw telecom.
This article is an in-depth look at Level 3 Communications for those not yet familiar with the company. Topics include:
- Management Change
- TWTC Acquisition
- Financials (Pro-Forma)
- Growth outlook (Pro-Forma)
- Valuation (Pro-Forma)
- Debt (Pro-Forma)
- Open tax issues
- Final thoughts
LVLT ran into major problems integrating past acquisitions resulting in the resignation of the then, president, COO and co-founder. Jeff Storey was brought in as president and COO as the company was experiencing the following:
- An increase in the time it took to activate service for customers, hurting revenue growth
- The company was taking longer to resolve customer network service issues
- The company didn’t have adequate provisioning capability to convert orders to revenue
- The company lacked adequate internal controls
Growth stalled but the problems were resolved avoiding what would have been a disaster for the company.
Doubts still remained concerning Level 3’s ability to turn the ship around under the current CEO. In April, 2013 LVLT issued a statement concerning a leadership transition…
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