Value Line has initiated coverage of Level 3 Communications, Inc. (LVLT) in its flagship product, The Value Line Investment Survey. Headquartered in Broomfield, Colorado, the company delivers a broad range of integrated communications services in 55 countries around the world and has about 10,800 employees. In 2012, total revenues totaled $6.376 billion, split between North America (75%), Europe (14%), Latin America (10%), and other (1%).

Level 3 was originally incorporated as Peter Kiewit Sons’, Inc. in Delaware in 1941 to continue a construction business founded in Omaha, Nebraska in 1884. In subsequent years, it invested a portion of the cash flow generated by the construction activities to a variety of other segments, including the communications business. In 1998, the construction arm was spun off and the remaining entity became known as Level 3 Communications. (The construction business is still around as privately-owned Peter Kiewit Sons’, Inc. and is a large player in the heavy construction industry.) On April 1, 1998, Level 3 held its initial public offering and its common stock began trading on the NASDAQ stock market. Throughout the years, the company continued to shed noncore assets, including a coal mining business as recently as November, 2011, as it made strategic purchases to focus on communications operations.

Level 3 serves a wide range of wholesale and enterprise customers over a fiber optic network deploying Internet Protocol technologies. The company’s fiber optic network has extensive reach across North America, Europe, and Latin America, as well as under the oceans connecting those three regions. Additionally, it purchases capacity on third parties’ undersea cables to allow it to offer services in Asia, Africa, and Australia. Further expansion of the fiber optic network will continue to be a focus.

Currently, the company has its sights set on growing revenue by increasing sales generated by its Core Network Services (which makes up about 88% of the top line); improving the customer experience to increase customer retention; completing the integration of acquired businesses; lowering expenses; achieving sustainable generation of positive free cash flows; localizing certain decision making and interaction with mid-market enterprise customers; managing Wholesale Voice Services for margin contribution; and refinancing its future debt maturities.

Level 3’s primary competitors are long distance carriers, incumbent local exchange carriers (ILECs), competitive local exchange carriers (CLECs), post telephone and telegraphs (PTTS), content delivery network (CDN) companies, and other businesses that provide communications services. While no other companies provide all of the same services in the same regions, competitors include AT&T (T - Free AT&T Stock Report), Verizon (VZ - Free Verizon Stock Report), CenturyLink (CTL), TW Telecom (TWTC), Equinix (EQIX), BT Group (BT), Telefonica (TEF), Akamai Technologies (AKAM) and Limelight Networks (LLNW).

Since going public, the company has turned an annual profit in only one year; and that was in 1998. Of course, this cannot continue in the long-term and poses limits to Level 3’s ability to fund network expansion and invest in its products and services. Adding to these woes is the substantial amount of long-term debt, which comes to about 88% of its total capital. The required principal and interest payments on these borrowing further restrict its financial flexibility. That said, consensus earnings estimates indicate the company’s bottom line may enter the black in 2014.

Subscribers interested in this communications provider are advised to consult Value Line’s quarterly reports, as well as any supplemental reports and relevant articles as important news items arise.

The author did not have positions in any of the companies mentioned at the time of this article’s writing.