Raising outlook after strong 1Q - UBS
?? Raising numbers on Level 3 given revenue and margin trajectory…
We are raising our estimates for revenue and EBITDA growth at Level 3 following
strong 1Q results, including the first yoy growth in Communications revenue since
3Q08. LVLT expects seq growth in CNS revenue to strengthen in 2Q; given our
outlook for gradual improvement in the business climate this year, we believe
wholesale, large enterprise and federal and mid-market could also improve.
?? …But the company still faces headwinds
Free cash flow under the company definition (cash from ops less capex) was inline
at -$115M in 1Q. For the rest of 2011, LVLT expects breakeven FCF (UBSe
+$4M), leading to negative free cash for the year (UBSe -$111M). For LVLT
stand-alone, we look for FCF (CFO less capex) of -$40M in 2012. Global Crossing
should be accretive immediately, although our model does not yet reflect the deal.
?? Tweaking EPS outlook for 2011E and 2012E
We now expect 2011E rev growth of 3.2% (prev. 2.3%) and adj EBITDA growth
of 10.1% (prev. 5.6%). Adj EBITDA margin is forecast to be 24.9% (prev. 24.1%)
while capex remains $456M (~12% of sales). Despite higher interest expense from
the recent $600M debt sale, our 2011E EPS goes to -$0.36 from -$0.38, while
2012E goes to -$0.25 from -$0.28.
?? Valuation: Maintain Neutral, New PT $2.50
With the above adjustments and a 12% WACC (prev. 13%), our DCF-based PT
moves to $2.50 from $1.60 (3% perp growth). We maintain our Neutral rating as
we assess the prospects of LVLT’s pending combination with Global Crossing.>>
