Level 3 (LVLT) revenue vs diluted shares by D Klein 7/19/09

Trying to predict the future direction of this stock has not been easy over the years.  The unbelievable projections given by management in pre-2000 caused the stock to soar above $100 per share amid the internet euphoria and it turned out managements projections were not only unbelievable but embarrassingly so.  After about a decade of just surviving, M&A, financial engineering, and massive dilution along the way where is the company in terms of increasing revenues per share.  I went back and looked at revenue per diluted share. Why?  Because the company has been unable to grow organically so they went through several M&A’s and dilution both to increase revenue and survive.  Below is the raw data per the numbers in the model I publish on the investor exchanges web site.

YEAR Diluted Shares Revenue /diluted share Approx year end stock price Price to revenue
2000     $32.81  
2001 383 $3.40 $5.00 1.47
2002 428 $2.57 $4.90 1.90
2003 765 $2.55 $5.70 2.23
2004 818 $2.06 $3.39 1.65
2005 1,297 $1.27 $2.87 2.26
2006 1,715 $1.93 $5.60 2.90
2007 1,915 $2.19 $3.04 1.39
2008 2,167 $1.95 $0.70 0.36

Revenue per diluted share was declining until 2005+- and started to turn around due to M&A’s, until they ran into the integration problems, which management conceded to, followed by revenues stalling. Year 2008 ended with a revenue ratio of $1.95 per share, a far cry away from the predicted revenues of around $40.00/share before the internet bubble burst way back when.  Year 2009 has gotten off to a rocky start with revenue per share set to decline further given the data to date. 

LVLT needs to grow revenue without the increase being masked by more dilution.  I know this is a simplistic way to look at it but it has been a reliable  indicator of stock growth, and revenue per share effects everything to PE’s, cash flow ratios, etc.  The stock will be priced on per share data so any increases in overall numbers must be accompanied by increases in per share numbers even if we are only talking about expectations that are to be believed.

So what’s next?  My guess is if organic growth is a problem then M&A’s will continue.  We heard the Sprint rumors, etc., which could be a plus but the devil is in the details with any acquisition (debt and dilution).  For the stock ever to return to double digits (or upper single digit for that matter) they will not only need to dramatically improve the top line expectations per share but show they can generate organic growth once any acquisition is consummated (to eliminate the disappointment which followed past mergers).  It’s all about results and expectations, so far management has been a disappointment in both these departments.

The stock price fell off a cliff around the end of 2008 due not only to economic concerns but also how little confidence was left for this management team, which seems to have rebounded somewhat as of this writing.  Maybe there is an expectation that Storey may provide better leadership. The Price to revenue of about .36 at the end of 2008 shows either LVLT has bottomed or there is more bad news to come, however the price has rebounded quite nicely from its lows.  Maybe expectations are finally starting to rise going into the next conference call/earnings report.  I’ll go out on a limb and say the stock bottomed and is now fairly priced, maybe a bit to the high side, given what we know today IMO.

Stay tuned for the next earnings report or any M&A activity.


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