Has Level 3 Communications, Inc. (LVLT) Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock, then decide if Level 3 Communications, Inc. (NYSE:LVLT) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it’s certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let’s take a closer look at Level 3 Communications.

Factor What We Want to See Actual Pass or Fail?
Growth 5-year annual revenue growth > 15% 8.4% Fail
1-year revenue growth > 12% 47.1% Pass
Margins Gross margin > 35% 59.2% Pass
Net margin > 15% (6.6%) Fail
Balance sheet Debt to equity < 50% 750.5% Fail
Current ratio > 1.3 1.02 Fail
Opportunities Return on equity > 15% (35.7%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current yield > 2% 0% Fail
5-year dividend growth > 10% 0% Fail
Total score 2 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Level 3 Communications last year, the company hasn’t been able to improve on its two-point score, as it has remained unprofitable. The stock has performed badly, falling nearly 20% over the past year.