Wells Fargo Weighs In On Level 3 Exploring Strategic Alternatives

Benzinga Pro on Wednesday morning reported that Level 3 Communications, Inc. LVLT is reviewing strategic alternatives to maximize shareholder value, including outright sale or a large buyback.

Shares of Level 3 hit a new 52-week high of $57.59 and was trading recently at $56.28, up 3.49 percent on the day. Wells Fargo's senior analyst Jennifer Fritzche commented on the news in a note to clients.

Related Link: Level 3 Shares Spike After Benzinga Pro Reports Company Considering Strategic Alternatives

Fritzche stated that on numerous occasions, she suggested Level 3 Communications will pursue strategic M&A options, most likely as a buyer, or initiate a share buyback program given its "significant" free cash flow that is expected to grow from $1.78 per share in fiscal 2015 to $3.07 in fiscal 2016.

The analyst added that on a valuation basis, Level 3 Communications' stock "still trades at a significant discount" to its vertical peers that boast similar characteristics, such as high barriers to entry and high contribution margins.

Fritzche also argues the company "has more of a scarce asset than these other sectors."

Finally, on a valuation basis alone (including Wednesday's near 4 percent gain), shares of Level 3 Communications are trading at a 6x multiple to the data centers and a 8x discount to the towers.