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Level 3 Communications

SIF – Stock Pitch Competition. Level 3 Communications. Presented by Pavel Matsibekker , Andrew Chang, Andy Lin, Jingfu Huang and Jay Ji. Industry Overview. More customers due to increased use of smartphones, internet ready devices.

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Level 3 Communications

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  1. SIF – Stock Pitch Competition Level 3 Communications Presented by PavelMatsibekker, Andrew Chang, Andy Lin, Jingfu Huang and Jay Ji Stern Investment Fund - High Tech Group

  2. Industry Overview • More customers due to increased use of smartphones, internet ready devices. • Growth potential in foreign countries and rising demand for mobile video. • Worldwide telecommunications services revenue is projected to increase from $2.1 trillion in 2012 to $2.7 trillion in 2017 at a combined average growth rate of 5.3%. (Insight Research) • Consumers will give up many other luxuries before their mobile devices. • Use of wireless in areas like health care, retail and automotive may lead to new business models, revenue sources. (Deloitte) Stern Investment Fund - High Tech Group

  3. Company overview and product/business breakdown • Founded in 1985, spin off from contractor Kiewit • Went public in 1998 • Tier 1 Internet provider – only 1 of 14 globally • Services delivered to more than 45 countries • “Backbone of the Internet”: fiber optic network, undersea cables, data centers, VoIP services • Customers are wholesale and enterprise Stern Investment Fund - High Tech Group

  4. Stock Performance Since inception Last 2 years Stern Investment Fund - High Tech Group

  5. Stock performance and Financials • 52 week high at $27.99 and low at $16.36 • Current price is $18.86 • Market Cap is $4.38 Billion but Enterprise Value is estimated at $12.29 Billion • Operating Cash Flow is $363 Million. Revenues have remained steady this year. EPS is negative this year with expectation of -$1.75 for the year. Stern Investment Fund - High Tech Group

  6. Investment Theses • Synergy benefits from the Global Crossing integration have been underweighted • The company’s fundamentals suggest the stock is undervalued. • The growth of the revenue in the emerging market. • Mean-reverse trend to the stock price Stern Investment Fund - High Tech Group

  7. Valuation • The Mean Expected price from the analysts is $27.23, while Low Target is 17 and High Target is 45. • Our comparable valuation (TEV/Sales) comes to the Target Price range from 21.58 to 36.13, while our DCF valuation comes to the average price 24. Stern Investment Fund - High Tech Group

  8. TEV to Sales Valuation • Because the company has a negative Net Income during the past three years, P/E ratio is not suitable here. TEV to Total Revenue ratio provides a whole picture of the industry. • The industry has an TEV to Total Revenue ratio from 2.0x to 2.5x, eliminating outliners. • We conclude the price range from 21.58 to 36.13 per share, which means an average 60% upside potential in stock price. Stern Investment Fund - High Tech Group

  9. TEV to Revenue Valuation LVLT has a TEV/Total Revenue ratio of 1.9x, lower than the industry mainly because of 1) Huge debt burden, 2) Low margin, but it is expected to improve by the above average growth Stern Investment Fund - High Tech Group

  10. DCF Valuation • Key assumption: Beta is 1.58 and Cost of Equity 11.64% and Cost of Debt is 8.95%;WACC 8.01%;long term economics growth rate 3%. • Valuation Vehicle: FCFE. • Target price range: 24 to 31 Stern Investment Fund - High Tech Group

  11. Insider Trading Stern Investment Fund - High Tech Group

  12. Risk factors (macro) • Decline in general economic growth • Europe • Interest rate risk • Synergies less than effective • Sales lower than expected Stern Investment Fund - High Tech Group

  13. Risks of Investments (individual) • Expected volatility, implied volatility • Expected shortfall • Garch Stern Investment Fund - High Tech Group

  14. Thank You • Q&A Stern Investment Fund - High Tech Group

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