Latest report on WCOM from Lehman Brothers:
Headline: WorldCom, Inc: Awesome growth position in consolidating telecom market
Author: Blake Bath/Dan Fletcher 1(202)452-4732/1(212)526-3375
Rating: 1
Company: WCOM MCIC
Country: COM CUS
Industry: TELECM
Ticker : WCOM Rank(Prev): 1-Buy Rank(Curr): 1-Buy
Price : $38 3/4 52wk Range: $40-21 Price Target: $53 New
Today's Date : 03/13/98
Fiscal Year : DEC
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EPS 1996 1997 1998(1) 1999
QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr.
1st: 0.21A 0.05A 0.05A - -E 0.17E - -E - -E
2nd: 0.25A 0.08A 0.08A - -E 0.19E - -E - -E
3rd: 0.27A 0.12A 0.12A - -E 0.22E - -E - -E
4th: 0.29A 0.15A 0.15A - -E 0.27E - -E - -E
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Year:$ 1.02A $ 0.40A $ 0.40A $ 0.80E $ 0.85E $ - -E $ 1.98E
Street Est.: $ 0.38E $ 0.39E $ 0.87E $ 0.86E $ 1.87E $ 1.88E
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Price (As of 3/12): $38 3/4 Revenue (1998)(1): $ 10.7 Bil.
Return On Equity (98): N/A Proj. 5yr EPS Grth: 60 %
Shares Outstanding: 990 Mil. Dividend Yield: N/A
Mkt Capitalization: 37.6 Bil. P/E 1998; 1999 : 44.7 X; 19.1 X
Current Book Value: N/A Convertible: None
Debt-to-Capital: 26 % Disclosure(s): C
(1) 1998 estimate is for WorldCom standalone.
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* We believe the combined MCI WorldCom will be superbly positioned for the consolidating telecom industry given its scale and asset mix. We are publishing revised estimates and setting a 12 month price target of $53.
* The entrepreneurial culture and strong positioning in business LD and the key telecom growth areas (international, internet, and CLEC) provides an excellent platform for providing evolving market demanded data/voice services.
* Our 1999 and 2000 EPS estimates of $1.98 and $2.64 reflect combined annual revenue and EBITDA growth of 17% and 25% through 2000 driven by topline growth of nearly 50% in the key growth areas, with EBITDA/EPS growth augmented by the powerful cost savings of the combination.
* The historical commercial and technical relationships between MCI and WCOM should help deliver early evidence of the material network and SG&A savings of the combination. We expect evidence of these synergies to emerge in 2H98, driving the EPS uplift of >$0.70 in 1999.
* Valuation: MCI WorldCom trades at less than 8X projected 1999 EBITDA, despite a 25% annual EBITDA growth profile, just slightly above the average RBOC multiple of 6.5X, and the 7-7.5 multiples of AT&T (T,64 1/4,1) and Sprint (FON,68 1/4,1). Our $53 price target is 20X our 2000 EPS estimate of $2.64.
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A Strong Combination In a Rapidly Changing/Consolidating Industry
We believe the positioning of the combined MCI WorldCom provides a strong platform for large-scale growth in the rapidly changing and consolidating telecom industry. The combined company will have a 30%+ market share in the US business long distance market, and the leading position among U.S carriers in the fast growing international, internet, and CLEC sectors. The large share of the critical business long distance market should provide an excellent platform for selling the CLEC and Internet services that these customers increasingly demand. Both MCI and WorldCom have strong histories of being entrepreneurial attackers. Given a strong culture of execution and the
scale and positioning to address changing marketplace needs, we believe the company will fare very well over the next few years.
Growth Where It Counts
Over the next five years, we believe the combined company will deliver far-and-away the fastest top-line growth among its major large-cap peers. Importantly, the majority of the growth going forward is not coming from capturing incremental market share in the highly competitive business long distance market. Rather, the key drivers of growth are capturing share from monopolies in the local phone market and in foreign countries (something WCOM has already demonstrated a strong ability to deliver), and in participating in the continuing explosive growth of the Internet. In the 3 key growth markets
(local,Internet, and international), we believe WCOM will grow at roughly 50% annually over the next 5 years.
Table 1: Combined Revenue Streams in Key Markets ($Billions)
5-Year
1997 1998 1999 2000 CAGR 97-02
Business Long Distance 16.7 18.3 21.0 22.7 11%
Business Local 0.9 1.8 3.1 4.2 50%
International 0.8 1.4 2.0 2.5 48%
Internet 0.9 2.3 3.6 5.2 53%
Other 7.9 8.6 9.0 10.8 11%
Total Revenues 27.2 32.4 38.7 44.4 17%
Source: Lehman Brothers Research estimates
Key Forecast Parameters
Our EPS, Balance sheet, and cash flow models are now available upon request, with key figures summarized below.
($ Bill) 1998E (1) 1999E 2000E
Total Revenues 10.7 38.7 44.4
EBITDA 3.0 11.6 14.4
EPS $0.85 $1.98 $2.64
(1) 1998E is WorldCom standalone.
Valuation - Cheap for the Growth:
When we upgraded WCOM in November 1997, we noted that the stock traded at a multiple of EBITDA similar to that of the RBOCs. Today, WCOM still trades at a multiple fairly close to that of its large cap peers, yet we expect it to grow EBITDA at a rate 4-5 times faster than the RBOCs and 1.5-2 times that of the major long distance carriers. As the proposed combination receives regulatory approval, and the company demonstrates in late 1998 and into 1999 that it is on target to deliver on its EBITDA savings estimate for 1999 of $2.5B, we believe it will significantly outperform the market as both its multiple gap increases versus its peers, and as it continues to outgrow them.
RBOC WCOM FON T Avg.
FV/'99 EBITDA 7.8X 7.4X 6.9X 6.5X
EBITDA Growth CAGR (99-02) 25% 11% 16% 5-6%
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. ] |
