To answer whether this is a good business (and not just apparently cheap based on traditional superficial measures) I coincidentally just did a new return on capital calc on WCOM today, based on its latest results. Largely, I go by Stern and Stewart's version when doing this. In terms of earning cost of capital, Worldcom is doing a poor job.
In fact, it is not earning its cost of capital. After accounting for past pooling acquisitions, and breaking down Worldcom's cash flows, I figure the company is going to earn, optimistically, $8 billion in cash earnings on invested cash thus far somewhat above $90 billion. Even looking ahead and taking analysts estimates into consideration, I'm seeing at best a 10% return here and hence WCOM is not earning whatever its cost of capital may be - I'm estimating at least 12%.
Right now, it trades above its capital even though it is not earning the cost of its capital. Not good. This may change as WCOM finds a way to leverage its investment into further profits down the road. The latest quarterly report provides a hint of this. But it has said it will have massive capital expenditures in the future - and current cash levels imply additional borrowings to do it. All this will dilute returns further.
I think with T and WCOM, we'd have to find a way to analyze the current levels of investment and somehow come to a conclusion that future earnings will grow quite significantly off this base alone. One wonders what degree of empire building is going on - what is motivating management? Right now, T seems to have the greatest potential because of its cable assets, but it is potential. Management has to execute. Plans to spin off or merge with BT tell me that management is responding to the wrong inputs right now. Ebbers' Sprint plan told me he is responding to the wrong inputs as well.
Good investing,
Mike |
