Downgrading LVLT to Hold, Prefer CCOI Instead

3/12 - "We believe the mgmt shake-up highlights continued operating challenges at LVLT...As with 2007, 2008 guidance implies both a revs acceleration and large EBITDA ramp in the back-half of the year. With a high likelihood that both revs and EBITDA fall in Q1:08, from Q4:07, we see little near-term catalysts for the stock. Additionally, should the economy weaken further, H2:08 assumptions by the company may prove to be aggressive...Although LVLT had $725MM in cash as of YE07, the company is not expected to generate positive FCF until 2009 (pushed back from a prior expectation of 2008). With roughly $1.3B of low-cost debt coming due prior to YE10, LVLT could be faced with refinancing concerns over the next 24 months."

"We value LVLT shares in the range of $2.00-$2.50 as of YE08. This implies, at the midpoint, EV/EBITDA multiples of 8.7x 09E and 7.2x 10E - a slight contraction from the current trading multiples of 9.5x 08E and 8.1x 09E. Key risks include (1) provisioning, (2) rebuilding the sales pipeline, and (3) a challenging operating environment...In the backbone space we currently prefer Cogent Communications (CCOI, Buy, $17.43). CCOI has no exposure to declining revenues streams (such as Frame and ATM), and is forecast to generate $0.80 in FCF/share in 2008 (growing at a CAGR of 50% over the next several years)."