Why Is Level 3 Communications, Inc. Rising 4% Today?

By Markets Fool.com

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Image source: Level 3.

This morning, long-haul networking expert Level 3 Communications reported results for the first quarter of fiscal year 2015. The period was a bit of a mixed bag compared to analyst estimates. The stock still jumped 4% higher on the news, setting a fresh all-time high in the process.

On average, Wall Street analysts were expecting EPS of $0.33 on $2.06 billion in sales. Level 3 reported earnings of $0.35 per share, down from $0.47 a year ago, but slightly above the analyst target. Revenue increased 28% year over year, landing at $2.05 billion.

Of course, these figures include $408 million of revenue contributions from recently acquired network operator tw telecom. Redoing the math as if tw telecom had been a part of Level 3 from the start of 2014, the combined company actually saw just 2% organic sales growth. On the other hand, we'd be talking about a 17% earnings increase under those circumstances, since tw telecom recorded a $13 million net loss in the year-ago quarter.

The core network services division recorded 4% year-over-year sales growth, using those tw telecom-adjusted pro forma numbers. Excluding the effect of currency exchange headwinds, the division saw 6% growth in constant currency figures. The Americas did well on this basis, but Level 3's European operations held the company back. In constant currency, sales in that market shrank by 1%. Including the impact of the strong dollar, it was a 9.2% drop.

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Level 3 CEO Jeff Storey didn't mention the currency challenges in his prepared remarks. Instead, he focused on his company's profitable growth, and the integration of a $5.7 billion acquisition.

Level 3 CEO Jeff Storey. Image source: Level 3.

"Customers are seeing the benefits of the acquisition," Storey said, "including our differentiated products and solutions, expanded network footprint and customer-first approach."

Looking ahead, Level 3 raised its guidance for full-year EBITDA profit growth from roughly 14% to 15.5%. It also raised its 2015 free cash flow target by 9%, with the new guidance range spanning from $600 million to $650 million. These revisions rest on stronger buyout synergies than expected, as tw telecom's focus on local and metro networks in North America meshed smoothly with Level 3's global reach.

What we have here is a solid networking stock with no growth to speak of, but poised for plenty of cost-savings opportunities and expansion into new markets.

The networking sector is tempting right now, because the quiet rise of the Internet of Things will benefit all kinds of players in this space during the next several years. Is Level 3 the best choice for Internet of Things investors today? Maybe, if Jeff Storey continues to play his cards right.

But the stock is priced for perfection, trading at an enterprise value to EBITDA ratio of more than 17 times trailing results. You can buy sector rivals (and fellow low-growth businesses) Verizon and AT&T at about half of Level 3's EV-to-EBITDA ratio. Cisco Systems is also available with a deep discount, if you prefer to play closer to the hardware side of the networking equation. All of these alternatives also pay decent dividends, but Level 3 doesn't offer a dividend at all.

I'm still interested in Level 3, but not at these prices. In my view, it's best to keep an eye on Level 3 and its stock, ready to pounce on sudden price drops like the temporary 20% reduction Level 3 saw in October.

Patience is a virtue, especially for long-term investors.

The article Why Is Level 3 Communications, Inc. Rising 4% Today? originally appeared on Fool.com.

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Apple, Cisco Systems, and Verizon Communications. The Motley Fool also owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.