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Technology Stocks : WCOM -- Ignore unavailable to you. Want to Upgrade?

To: Mark Harjes who wrote (4348)	4/30/1999 4:29:00 PM
From: VFD	Respond to of 11568

Just in case this has not already been posted. Industry Analysis Apr 30, 1999 Telecom: Why MCI Worldcom Looks Terrific Analyst: Chris Bulkey MCI Worldcom (NASDAQ:WCOM - news) reported strong first quarter results on Thursday, as last year's merger continues to progress ahead of expectations. As we wrote in our April 12th recommendation of MCI Worldcom (Nasdaq:WCOM - news), shares are being pressured by concerns about how the company will acquire wireless capabilities. We continue to believe that MCI Worldcom is establishing a strong worldwide telecommunications franchise that will generate considerable shareholder value over the long-term. First quarter communications services revenue (excluding Embratel, and assuming the MCI merger occurred at the beginning of 1998) rose 17% to $7.9 billion. Earnings per share (EPS) increased to $0.37 from $0.18 (excluding charges) in the prior year, and were $0.03 ahead of consensus estimates. Revenue growth was driven by a continued shift to a more favorable mix with increased contribution from data, Internet and international sales. Perhaps the most important result is that the upside came from better than expected synergies from the merger. The fact that new business lines are contributing to the top line combined with improving margins due to realized synergies confirms that the company is executing its strategy very well. CEO Bernard Ebbers summarized the results by calling the first quarter "excellent." He is particularly pleased with the margin improvement and earnings performance. He adds that the divestiture of non-core assets has freed up resources to increase investment in three key areas: Internet, local and international services. In our previous recommendation we noted that investment in international expansion, Internet and data had us particularly excited about the company's strategy. With those initiatives tracking ahead of plan we continue to favor the long-term outlook. Nextel Concerns At this point the shares are being constrained by concerns over a possible combination with Nextel (NASDAQ:NXTL - news) for access to the missing piece of the company's product portfolio - wireless capabilities. Investors are concerned that an acquisition would lead to significant dilution of future earnings. Contrary opinions claim that a likely scenario would be a pooling of interests combination that would allow MCI Worldcom to use Nextel's deferred tax assets. In any event, analysts agree that management has an excellent track record, and will not pursue any transaction that would dilute shareholder value. The progress of the strategic initiatives from last year, including the merger and international expansion, should give investors confidence in management's ability to execute its business plan. MCI Worldcom and Nextel have been in discussion for several weeks regarding a possible combination, but no decision has yet been reached. On the conference call yesterday, CEO Ebbers was unwilling to discuss the status of the discussions, which is partly responsible for the Street's tepid reaction to yesterday's positive earnings announcement. Without knowing what the outcome will be, regarding the Nextel discussions, we can only use management's track record for execution and focus on shareholder value as a proxy. The company's reputation among the analytic community is excellent. Warburg Dillon Read analyst Linda Metzler notes that MCI Worldcom's longstanding track record is virtually unmatched in the industry. At the time of the merger between MCI and Worldcom, the Street was skeptical about management's ability to generate double digit revenue growth, while successfully integrating operations. Considering that the upside in the first quarter occurred below the top-line with effective operating expense leverage shows that integration is proceeding well. The fact that a company with a $1.9 billion market capitalization can generate 17% revenue growth further refutes skeptical viewpoints. Near-term upside could continue to be limited by concerns surrounding the Nextel talks and an expensive valuation. At a recent $81.25, the shares currently trade at 28.8 times fiscal 2000 consensus estimates of $2.82 per share. Earnings, however, are forecast to increase 43% next year, which is exceptional for a company of this size. One area of concern is the recent insider selling in MCI Worldcom shares. The feedback I have received indicates that the selling is related to valuation, and not because of a deterioration of the company's earnings prospects. While the stock could be dead money until the wireless issue is resolved, the long-term outlook is excellent. If not for the aforementioned concerns the stock would be reacting much more favorably to the positive earnings news. Bottom Line: A price target of 35 times the 2000 consensus estimate results in a 12-month price target of $99. If the wireless concerns turn out to be overdone, the stock could reach our price target much sooner.