The New WCOM/MCI:
I haven't posted here in a while, but I lurk and follow the company and industry. Some thoughts:
1. With this tracking stock, WCOM management is saying they no longer consider themselves to be a growth company. For the entire previous history of the company, they used cash flow (and steadily increasing debt) to invest in new markets (new geographies and new technologies). Now, their cash flow is going to go to bondholders (since their debt is so high), and stockholders (14% dividend on the tracking stock).
2. Investors who hold a stock (any stock in any industry) for its dividend, want safety and reliability above all else. So, the high dividend will only attract investors if they think the business model guarantees a continuation of the cash flows to maintain that dividend, into the indefinite future. This is clearly not the case. MCI is being reborn as a dwarf with a terminal illness. A mangled shadow of it's former self. It's a virtual certainty that the current dividend is unsustainable. No safety = no rationale for holding the stock. I predict that the stock will be volatile, and within a year of the spinoff, the stock price will permanently sink below the initial price. If the New MCI isn't a safe stock, and the new WCOM isn't a growth stock, why own either?
3. The telcos (service providers and equips) are just at the beginning of a multi-year process of writing off bad debt, bankrupcies, consolidations, etc. I'd guesstimate that 100-200B of the 700-800B in debt that European and N. American telcos added in the 1990s is never going to be repaid. For WCOM to be doing record debt offerings, and giving away their cash flows, as we go into this Darwinian "winnowing out" period, is a very bad idea. They should be frantically hoarding cash, reducing debt, and holding onto every dollar of cash flow, if they intend on being a survivor.
4. I think Ebbers is smart enough to know the above, and so his actions say he doesn't intend the company (either of them) to be a survivor. Rather, he intends them to be bought by survivors. WCOM will probably be bought. MCI may be bought, or it may just slowly wither away till nothing is left. But WCOM won't be bought this year, or probably next, for regulatory reasons. Who is going to buy it? Nationalism means a foreign company won't be allowed to, and the RBOCs are the only domestic companies with the ability to buy WCOM, and they can't do LD phone nationwide yet.
5. Right now, the RBOCs are strong (relatively speaking), because they have defeated the intent of deregulation, and found devious ways to maintain defacto local monopolies. But, this isn't going to last. There are going to be technological solutions, creating alternative last-mile routes (cable, wireless). Once that happens, the RBOCS are going to be in as sad a shape as T, WCOM, and the herd of dying telco startups. So, several years from now, none of them may be in a position to buy WCOM, either.
6. Conclusion: when I sold my WCOM last December (for a huge loss), I expected to buy it back when the stock looked to be bottoming. If I still believed the LT story, I'd be buying back now. But, the companies' prior business model has been abandoned, and I don't see any viable new business model. So I won't be buying back, except possibly for short-term range trading. At the moment, I think the equips (CSCO, JDSU, QCOM) are better LT investments. I expect to buy them, sometime in 2002 or 2003.
OT re interest rates: Greenspan has said recently that he sees no inflation risk. I see lots of signs: LT interest rates not following ST rates down, gold strength, unsustainable strength in the dollar, inflation in labor costs and oil. However, it's his opinion that matters, so I guess he'll just keep lowering ST rates to whatever extent necessary to put a floor under consumer confidence, consumer spending, and stock prices. This process comes to an ugly end, when inflation goes over 4%, and we are nearly there. Compare the stock market indexes and inflation rate for the last 100 years: when inflation is over 4%, stocks do poorly.
I am more pessimistic now than I was in January. |
