WCOM: View from the talking heads:
Left for dead
Worldcom (WCOM) dials up trouble 2002-02-21
Do zany trades, questionable accounting practices, and heavy debt lead to an inexorable conclusion?
by Dave Sterman, equity research columnist
The telecom sector has been awash with bankruptcy filings over the last year. But when multi-billion dollar player Global Crossing (GX) sought protection from creditors, investors realized that no one is safe. And they turned their fearful sights on Worldcom (WCOM), speculating that this telecom titan too could also be in deep trouble. The kind of trouble that eventually makes a stock worthless.
Could Worldcom really go belly up? No way, say analysts. And many are saying that the stock is now quite cheap, after falling through the $10 barrier in late January on its way to a recent $6.50—a seven year low.
Sequentially declining revenue growth for seven straight quarters is enough to spook investors. But it’s Worldcom’s $28 billion debt burden that has been the primary cause for concern. Adding further mayhem to the mix, company chairman Bernhard Ebbers embarked on an unconventional (to say the least) plan to buy tech stocks using Worldcom shares as collateral. Many of his shares are now being sold on the open market to pay back margin calls, further pressuring the stock. Finally, new accounting concerns—especially as related to overhead allotment issues with its MCI (MCIT) tracking stock—are also raising flags.
Companies mentioned in this article
Global Crossing (GX)
Worldcom (WCOM)
MCI (MCIT)
But after Worldcom released Q4 results, analysts breathed a collective sigh of relief. While the quarter was weak as expected, it was, "much better than the current stock price reflects," says U.S. Bancorp Piper Jaffray’s Cary Robinson, who rates the stock a "strong buy." He adds that, "we have NO liquidity concerns," noting that Worldcom still has access to an additional $8 billion on its credit line and carries, "an investment-grade balance sheet."
Lehman Bros.’ Blake Bath is similarly bullish, noting that Worldcom was able to generate very strong free cash flow in the quarter. And now that the shares trade for just 5 times his 2002 EBITDA estimate, he believes that, "the stock sell-off has been way overdone."
Reports for further inquiry
Quarter Light as Expected: Growth Slowing Due to Recession
4Q & ’02 Mod Slower; Str. FCF & Solid B/S
Detailed: 4Q01 Weaker Than Expected
Details on 4Q: Confirms Fears of Slowdown; Disputes Negative Speculation
Bath justifies his "strong buy" rating on the expectation that the stock could double to the $11-$13 range and eventually rise back to $20-22 over the long-term, "as the market gets past slower (projected) ’02 growth and realizes longer term growth in the 9% area."
CIBC’s Tim Horan also has a "strong buy" rating on the stock, but his language reflects a bit more caution. He expects the company’s business to stabilize this year, but, "if we are wrong, Worldcom, Inc. will need to be much more aggressive in reducing expenses and capex." If business doesn’t stabilize, Horan speculates that Worldcom may eventually become an acquisition candidate.
Horan’s strong rating on the stock also belies another concern: Worldcom has apparently been pushing a constant amount of SG&A expenses on to MCI’s income statement every quarter, even as MCI’s revenues continue to fall. That move has enabled Worldcom to post rising profit margins. But Horan figures, "there is substantial risk that (Worldcom’s) management will need to reallocate more costs to WCOM." That would further pressure Worldcom’s profit outlook.
Taking the bearish view, Jefferies & Co.’s Richard Klugman thinks Worldcom’s revenue base will continue to shrink. He thinks the recent sell-of is quite justified and says it’s hard to envision a sustained rally from these levels. "Compared to Worldcom, the RBOC shares appear more favorable in our opinion," he says.
It’s fair to note that bullish analysts failed to predict the recent sell-off, and may lack credibility at the moment. But a perfect storm of jittery investors, a slow economy, and ill-fated trades by the company’s chairman gave the stock a downward push, giving some the impression that shares of Worldcom have been prematurely left for dead.
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