2012 Preview: Level 3 Communications

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With 2011 finally in the books, it's time to reflect on what has transpired this past year and which companies could be facing business-altering decisions in 2012. On today's plate we have telecommunications services provider Level 3 Communications (NYS: LVLT) .

But before we dig too deeply into what 2012 may have to offer, let's get a quick snapshot of how 2011 treated shareholders:

2011 Stock Return15.6%
Price-to-Earnings (TTM)NM
Price-to-Sales (TTM)0.9
Cash/Debt$0.46B / $7.78B
Projected 5-Year Growth Rate3.3%
Forward P/ENM

Source: Yahoo! Finance. B = billions. TTM = trailing 12 months. NM = not meaningful.

Level 3 shareholders endured a wild ride in 2011, with the stock at one point more than doubling from its 52-week lows only to completely reverse course and end the year just 15.6% higher than where it began -- although this is still a success by all measures, with the S&P 500 flat for 2011. But these results are now in the past. Let's look ahead and see what could be driving Level 3's stock price in 2012.

What to expect
The biggest question mark hovering over Level 3 heading into 2012 is how well the company can integrate its purchase of Global Crossing, which closed last year. If you recall, Global Crossing declared bankruptcy in 2002, and prior to its agreed buyout was likely worrying many of its shareholders with the possibility of another bankruptcy given its inability to turn a profit. Much like Bank of America purchasing Countrywide Financial, my concern revolves around whether Level 3 can take a business that has continuously lost money and turn it around, or if it will become a toxic drag on Level 3's results much like Countrywide has become to Bank of America.

An overall sector slowdown is also something worth keeping an eye on. In 2011 Akamai Technologies (NAS: AKAM) lost its cloak of invincibility and Limelight Networks (NAS: LLNW) stumbled dramatically. Factoring in a very unpopular 1-for-15 reverse split enacted in 2011, Level 3 is staring down some very large expected losses in 2012 according to analyst estimates. With operating results consistently worse than expectations in the past three quarters, shareholders could be in for more disappointments in 2012.

Finally, it all comes down to debt and cash flow. AT&T (NYS: T) offers similar services on a grander scale than Level 3 and boasts significantly more debt, but it has the cash flow to support its borrowing. With its cash flow being decisively negative, and the company adding even more debt to its balance sheet last year, I have to begin wondering if Level 3 will ever be able to turn things around.

Foolish roundup
I really would like to think this could be the year that Level 3 rewards its shareholders, but it's looking more and more like it'll be another year of significant losses and integration issues. If the company can't get its costs (and its debt) under control, there's just not much hope for the long term. With that said, I'm going to maintain my underperform rating on CAPS until I see more concrete steps toward profitability.

What are your thoughts on Level 3 heading into 2012? Share them in the comments section below and consider adding Level 3 Communications to your free and personalized watchlist to keep track of the latest news with the company.

Also, if you're looking for one more great idea heading into the new year, consider downloading a copy of our latest special report, "The Next Trillion-Dollar Revolution," in which our top-notch team of tech analysts highlights a company revolutionizing the tech space.

At the time this article was published Fool contributorSean Williamsowns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat has its readers' best interests on speed dial.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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