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Level 3 stock recovers from downgrade

Robertson Stephens cuts the broadband services provider's stock from a "strong buy" rating to "market perform" and lowers its 12-month price target.

    Broadband services provider Level 3 Communications got another dose of bad news Monday when Robertson Stephens downgraded its stock and lowered its 12-month price target.

    Analyst Jim Friedland cut the stock from a "strong buy" recommendation to "market perform" and set a new price target of $15 a share.

    On news of the downgrade, Level 3 shares fell as much as $1.25 to $12.50. By market close, however, shares actually rose 30 cents to $14.05.

    In his research note, Friedland said he re-evaluated the Level 3 business model and thought its previous long-term estimates were too aggressive. If the company is to meet its transport estimates in the next fives years, he added, it will have to sell several network outsourcing contracts to major carriers.

    "We do not believe that the long-term market for network outsourcing is large enough to support the company's long-term guidance," he wrote in a research note.

    Friedland also said his updated financial model of the company indicates Level 3 might not have the cash to meet its operating objectives.

    "We estimate the company is funded into the first half of 2003 and has a $1.6 billion to $1.7 billion funding gap in its business plan," he wrote.

    In its first quarter, Level 3 posted a loss of $535 million, or $1.45 a share, on sales of $449. Analysts were expecting a loss of $1.75 a share in the quarter.

    First Call consensus expects the company to lose $1.84 a share in the second quarter and $7.28 a share in the fiscal year.

    In April, Level 3 executives reduced their sales estimates for the next two years. The company now expects to record sales of between $1.4 billion and $1.5 billion in fiscal 2001 and sales of between $2.3 billion and $2.5 billion in fiscal 2002.

    Level 3 shares moved up to a 52-week high of $95.25 in June before sliding to a low of $9.13 in April.

    In late April, Level 3 agreed to restructure a network services contract with XO Communications. Originally, XO agreed to purchase $700 million in fiber-optic capacity in North America from Level 3.

    When it became apparent that XO Communications might default on its payments to Level 3, executives at Level 3 agreed to apply $128 million in payments previously made for network capacity in Europe toward the $700 million commitment in North America.

    On May 11, J.P. Morgan H&Q analyst David Barden cut Level 3 stock from a "buy" recommendation to a "long-term buy" rating, saying "Level 3 faces new challenges as the character of the U.S. and, by assumed extension, the global data market changes."

    On April 3, Level 3 Communications announced it would cut 325 employees, or about 6 percent of its staff.

    Thirteen of the 19 analysts tracking the stock give it either a "buy" or "strong buy" rating.