Stephens Upgrades Level 3 Communications, Sees Growth And M&A As Potential Catalysts

• Level 3 Communications, Inc. (NYSE: LVLT) shares have plunged 7.27 percent year to date, touching a low of $43.80 on January 20.
• Stephens’ Barry McCarver has upgraded the rating on the company from Equal-Weight to Overweight, while raising the price target from $52 to $63.
• Following the recent selloff in the stock, McCarver believes that the valuation is more reasonable, while expecting the company to witness revenue growth, additional M&A and margin expansion.

Analyst Barry McCarver stated that the company reported its 4Q15 results with the revenue below the consensus and the estimate and the adjusted EBITDA ahead of expectations, driven by annualized run-rate synergies of $216 million, ahead of the total target of $200 million.

For 2016, the company’s adjusted EBITDA guidance was above the pre-quarter consensus forecast. “LVLT’s revenue continues to grow as bandwidth needs increase and the Company takes share as enterprises need more IP services,” McCarver said.

McCarver also mentioned that Level 3 Communications was able to achieve its total synergy target from the integration of the TW Telecom within 16 months and was now witnessing accelerating revenue growth.

According to the Stephens report, “EMEA and Latin America should continue to improve as the Company invests in its network and has opportunities for more acquisitions. Headwinds from International revenue have neutralized and may become tailwinds this year.”

While expecting the company to continue to gain market share, McCarver said that Level 3 Communications benefits from its ability to provide international connectivity, with “the trend of enterprises expanding their network services internationally” still being in the early innings.

Following the 4Q15 results and the 2016 guidance, the FY16 and FY17 revenue, adjusted EBITDA and PF EPS estimates have been modified.