Analysts Come to MCI WorldCom's Defence
SmartMoney.com
July 1, 1999 4:28 PM ET
Shares of the phone giant rebounded Thursday after several Wall Street
firms reiterated their bullish stances. The 8% decline in the shares of the
telecommunications company Wednesday was an overreaction by
investors, analysts said.
The stock fell for a couple of reasons. Wednesday's Wall Street Journal
reported that the Justice Department is investigating the undersea-cable
business. The department is focusing on a single trans-Pacific cable
operated by a consortium of telecom companies, including MCI Worldcom.
In addition, Morgan Stanley Dean Witter analyst Simon Flannery said that
fears of a new price war among long distance phone service providers have
emerged in the wake of Frontier's (FRO) second-quarter earnings warning
earlier this week. Switched long distance pricing will only get weaker as
Baby Bells start making an aggressive push into the long distance area,
said Flannery in a research note.
But Jack Grubman at Salomon Smith Barney sees it differently. "We do not
believe there is a meltdown going on in the long distance industry. In fact,
Frontier's shortfall has less to do with industry pricing than it has to do with
customer losses. The industry is getting more competitive but pricing is
reasonably firm," said Grubman in a note late Wednesday.
Concern that network capacity is outpacing consumer demand has sparked
fears of downward pricing pressure. However, new bandwidth will lead to the
development of a slew of services, notes Grubman. And MCI WorldCom is
in a position "to capture a disproportionate amount of market share in the
high-value-added services," given the company's strong market position.
Grubman expects core revenue to rise 16% in the second quarter, and he
raised his second quarter earnings-per-share estimate by a penny to 44
cents. Grubman forecasts revenue growth of more than 17% in the third and
fourth quarters as voice revenue improves from the second quarter and the
company continues to focus more on data, Internet and international
services.
At its current "ridiculously cheap" valuation, "we would be massively buying
this stock," says Grubman. "Investors who don't take advantage of [the
company's] current stock price will be sorry," he said. The analyst
reiterated his Buy rating and 12-month price target of 130 on MCI
WorldCom shares. Investors may want to note that Grubman was a key
adviser in WorldCom's merger with MCI last year.
Meanwhile, Daniel Zito of Legg Mason reiterated his Buy rating on the stock
and J.C. Bradford analyst Marc Bacurin affirmed his Strong Buy
recommendation.
Still, Flannery got some support from Merrill Lynch's Daniel Reingold, who
agreed that the long distance industry has been faced with intensifying
competition, particularly in the sluggish U.S. voice business. Frontier's
warning provided more evidence of pricing pressures, Reingold said in a
note Thursday. The analyst lowered his revenue and earnings forecasts for
the current quarter and full year, but said that slowing revenue growth "looks
temporary." Revenue from data, international, and Internet services will
increasingly offset voice revenue, Reingold explains. While there is "no
doubt" that MCI WorldCom is seeing a revenue slowdown, "we believe the
past two days' 9.5% fall in share price is a dramatic overreaction," Reignold
said. The analyst reiterated his short-term Accumulate and long-term Buy
on MCI WorldCom shares.
Separately, MCI Worldcom said Thursday that it formed a new unit, Global
Solutions, to manage its $1 billion business providing integrated network
design, construction and maintenance to global corporations. Global
Solutions provides outsourcing services to 350 multinational customers,
including Nasdaq and GE Information Services.
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