Level 3 Communications Inc. (LVLT) was down sharply by 12% on Wednesday following a disappointing earnings report along with some concerns over guidance.  The company’s $170 million loss translates to a 10 cent loss in earnings per share, which was in-line with Street estimates.  The 14% drop in revenues to $916 million was worse than expected when the consensus data was looking for about $926 million in revenues.  The drop was initially on an earnings disappointment, but a cult-stock like Level 3 is going to trade more around its ongoing story and its ongoing situation than it will just a raw earnings per share and revenue figure.

One problem here in today’s world of post-crash investing is the EBITDA reporting (earnings before interest, taxes, depreciation, and amortization), something that more skeptical investors are starting to treat as a hat trick for dancing around the notion that the company is not profitable.  The company’s EBITDA for the Q3 period came to $213 million, and it put the EBITDA target for all of 2009 in a range of $900 to $950 million.  There was at least $9 million in free cash flow.  The company’s gross margin fell to 59% from right at 59.7%. 

The report was not entirely full of negative issues.  While LVLT is still leveraged to the hilt, the debt level at the end of the quarter was down 1% from the prior quarter and down about 2% from the end of 2008 to about $6.1 billion.  Because the company has been able to roll out its debt maturities from recent offerings, that hurdle of interest coverage and debt servicing is looking slightly better than before, and the company ended the quarter with about $532 million in cash and equivalents.

Some additional positive issues are a fairly fresh debt sale that was effectively a refinancing maturity roll-out.  And its recent launch of broadband offerings for cellular and data provider towers is something else that may add to Level 3’s business in 2010 and beyond.  Have you had your cell phone or your smart phone’s web connection just get knocked off? Then you know that the carriers need to add more bandwidth capability.  But after looking at capital expansion plans from Verizon (VZ), AT&T (T), Sprint (S), and others, it may be a later-2010 or even 2011 before you see much from them.

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Another still-pending issue is Level 3’s August request for $15 million in grant money under the stimulus package for bringing broadband to rural communities.

The company’s CEO noted that he remains cautious, but is seeing positive signs in the business as there are “improvements in the rate of decline” in the company’s core network services operations.  That may sound OK on the surface, but that won’t do it for a company that had rallied 100% since the March 9 date which traders are using as the key reversal closing date for when the bear market ended. Level 3 had also been up about 95% from the ending close of 2008.

A last issue comes to the stock’s chart — if you can trust a chart on a $1.00+ stock.  Level 3’s post-earnings reaction took the stock down well under its 50-day moving average of $1.31 at the time.  The 200-day moving average of $1.16 did hold as support.  That puts this stock in a possible trading band for the near-term.

The key takeaway here for investors is that even if Level 3’s situation is less dire, it is still a highly-leveraged company. There is also an ongoing suit brought against LVLT from HyperCube that is unresolved. And if you can trust a ‘consensus revenue target’ on a $1.00+ stock, the Thomson Reuters figure still has a projected revenue contraction from $3.77 billion for 2009 to $3.75 billion for 2010 and a slightly narrower loss.  Level 3 still loses money, and the company still wants you to invest on an EBITDA story, despite there not being any real growth on the horizon.

Level 3 is a classic example of a company that may benefit from recapitalization.  With debt servicing costs of $500 to $600 million on average, the company might benefit from either finding a rich uncle business relationship from a larger partner or from a dilutive capital raise to pay down debt as each maturity comes due.  Shareholders probably do not want any further dilution, so that may not be an option.  That leaves this stock in limbo, or at least in an investor no-man’s land scenario for the time being.

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