Here's the SSB report:
--SUMMARY:--MCI WorldCom, Inc.--Telecommunications Services
*We are reiterating our Buy on MCI WorldCom, raising our 12-month price
target to $130 up from $100, and establishing a 2001 eps estimate of $3.80
which represents a 31% growth rate off of our 2000 eps estimate of $2.90.
*At $130, WCOM would be trading at 34x our new 2001 eps estimate which is
1.2x our projected 5 year eps growth rate of 28% which we feel is
considerably low given that the top 20 companies in the S&P index trade at
a p/e roughly 2x-2.5x their 5-year growth rates.
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/98 EPS $0.18A $0.21A $0.21A $0.22A $0.82A
Previous 12/99 EPS $0.36A $0.43E $0.55E $0.67E $2.00E
Current 12/99 EPS $0.36A $0.43E $0.55E $0.67E $2.00E
Previous 12/00 EPS $N/A $N/A $N/A $N/A $2.90E
Current 12/00 EPS $N/A $N/A $N/A $N/A $2.90E
Previous 12/01 EPS $N/A $N/A $N/A $N/A $N/AE
Current 12/01 EPS $N/A $N/A $N/A $N/A $3.80E
Footnotes:
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1M Prior:No Change Price (5/13/99).....:$87.56
P/E Ratio 12/99.....:43.8x Target Price..:$130.00 Prior:100.00
P/E Ratio 12/00.....:30.2x Proj.5yr EPS Grth...:28.0%
Return on Eqty 98...:N/A% Book Value/Shr(99)..:26.00
LT Debt-to-Capital(a)26.6% Dividend............:$N/A
Revenue (99)........:34933.0mil Yield...............:N/A%
Shares Outstanding..:1900.0mil Convertible.........:No
Mkt. Capitalization.:166367.8mil Hedge Clause(s).....:#
Comments............:(a) Data as of the most recently reported quarter.
Comments............:(a) Data as of the most recently reported quarter.
--OPINION-------------------------------------------------------------------
We are reiterating our Buy on MCI WorldCom, raising our 12-month price
target to $130 up from $100, and establishing a 2001 eps estimate of
$3.80, which represents a 31% growth rate off of our 2000 eps estimate of
$2.90. At $130, WCOM would be trading at 34x our new 2001 eps estimate
which is 1.2x our projected 5 year eps growth rate of 28% which we feel
is considerably low given that the top 20 companies in the S&P index
trade at a p/e roughly 2x-2.5x their 5-year growth rates.
Furthermore, our 1999 through 2001 estimates are probably conservative
for 2 reasons. First, the estimates do not reflect revenue synergies
from MCI and WCOM which could add several hundred basis points to revenue
growth. Secondly, our EBITDA estimates are only derived by having EBITDA
growing in-line with revenues and then adding already forecasted cost
synergies. The positive impact of the mix change on EBITDA margins
(data, IP, international are outgrowing voice 6 to 1 and have higher
margins) are not in our numbers. Therefore, WCOM will either be beating
our estimates so we will be in the mode of raising numbers or WCOM will
be investing excess earnings back into the business which will ensure
sustainability of 40% versus 30% eps growth for a longer period of time.
In either case, it is a positive situation for WCOM's stock price.
At WCOM's June 2, 1999 analyst's meeting, we expect the company to detail
its capital spending focus on high-growth and high-margin telecom
segments which drive new services and applications, specifically,
international, data and IP. The calculus of value creation in telecom
will be driven by the ability to provide cross border data applications
in particular through on-net buildings worldwide. In particular the
ability to serve the upper half of the business market is key to having
superior growth since this market segment has the most scaleable telecom
needs and thus, will drive a disproportionate share of growth in data
(overall we believe data will account for 60%-70% of the revenue growth
in the global telecom industry).
The fact is that no company on the planet can match WCOM's capabilities
in this regard since WCOM has the best breadth & depth of network assets
on the planet and has product capabilities, support systems and overall
infrastructure to not only capture customers but to serve them as well.
In fact, while AT&T and the Bells spend an abundance of cash flow to
conduct World War III at the consumer level, WCOM will be continuing to
put network assets around the world in order to serve business customers
with global network solutions. These customers have scaleable
requirements and value network quality over price by 4 to 1 according to
surveys. Thus, WCOM's return on invested capital which is being deployed
to deliver global network solutions, should be quite high.
In particular, we believe the consequence of WCOM's deployment of capital
around the world to drive services on its own assets especially
high-speed data and IP solutions, manifests itself in a continual upward
velocity in terms of absolute revenue growth and employee productivity.
For example, WCOM's core telecom revenues, excluding SHL (which will be
sold) and other operations which are being phased out, grew 17% year over
year in 1Q99 up from 16.6% annual growth in 4Q98 in telecom services and
up from 1Q98 proforma growth of 15.5%.
This brings up what we call the mathematics of the mix change. At any
point in time the weighted average of the current revenue streams and
their respective growth rates is a good predictive tool for one year out
growth. Thus, one can plot a road map directionally which way growth
rates will go. For example, one year ago it was clear that one year out
WCOM's growth rate would be higher than the then existing 15.5% annual
core telecom revenue growth given the mix of businesses and their
growth. Thus, here we are at 17% a 150 basis point improvement. If one
took a snapshot of 1Q99 and simply did a weighted average of domestic
switched which grew 7%, data which grew 31%, international which grew
54%, and Internet which grew 60%, one would get a weighted average
prospective revenue growth of 20% which clearly is well above the current
17%. In fact to take a drastic scenario, domestic switched voice revenue
growth could literally go to zero and WCOM would still maintain at least
a 16% core telecom growth rate (2.5x AT&T's growth rate even with AT&T's
wireless growth).
In fact, the mathematics of the mix change brings us to the wireless
issue. At the end of the day, WCOM's top-line growth would not have been
enhanced enough to justify spending the capital on wireless since a
wireless asset in general will only help solidify voice growth (that is
assuming new generations can handle more than is currently the case as
evidenced by poor quality and congestion on all wireless networks).
Voice is not what is driving WCOM's overall growth thus spending capital
to simply bolster that line item if in fact that is the case, just didn't
pass financial scrutiny. WCOM's current revenue mix is driven towards
transferring data on a global basis and the capital associated with a
domestic mobile wireless addition to the bundle does not meet the
top-line growth hurdle. Roughly 70% of WCOM's revenue growth is from
enhanced data, IP and international none of which is enhanced by having a
domestic wireless network.
Thus, we acknowledge that wireless is a high growth industry and that
wireless will continue to become more important but given WCOM's current
mix of business and current growth drivers, at the end of the day, a
wireless asset as part of the current bundle would not have materially
impacted the growth rate.
To fuel WCOM's growth vehicle is products and services driven toward the
upper half of the business market which is the customer segment that will
drive the most growth in global data and IP traffic. In fact, large
business customers have sophisticated internal communications staff and
thus buy services on an a la carte basis using multiple vendors. The
notion of buying bundled services to this customer segment is foreign
since sophisticated corporate users will buy "best in class". Given
WCOM's unparalleled network assets around the world, ownership of the
world's largest IP backbone and its recent partnership with EDS for
network integration, WCOM is on every short list of every major business
user around the globe.
We would point out a Yankee group survey conducted 5 months ago which
surveyed over 300 large business customers on their growing telecom
needs. The Yankee group listed the top 10 things that large business
telecom managers listed as telecom needs but the list did not include
wireless. The number one need was more bandwidth followed by voice/data
convergence, higher protocol virtual private networks, more ATM/Frame
Relay backbone, and better service level agreements. The 10th item on
the list was stated by 8% of the respondents. Therefore, less than 8% of
telecom managers listed a wireless solution as a need. Even if the lack
of a wireless option hurts the selling effort to small and medium-sized
business customers this again is more a function of the voice business.
As we stated above, domestic switched voice revenue growth could
literally go from 7% today to zero and WCOM would still maintain at least
a 16% core telecom growth rate.
We would like to point out the every independent analyst model on the
"Street" has WCOM outgrowing AT&T by at least 2 to 1 on revenues, cash
flow and eps over anywhere from a 3 to 5 year period. We find it
interesting to note that none of these models include wireless for WCOM
but do include wireless for AT&T. WCOM looks at M&A transactions based
on financial justification not just based on how the headlines would
read. WCOM's global assets will increase growth and its revenue mix will
continue to improve without (after careful thought) domestic mobile
wireless as part of its mix. At the end of the day, although it might
have looked like a strategic "hole" had been filled if WCOM had purchased
wireless, WCOM's M&A decisions always translate into numbers that work
and something which fuels top-line and bottom-line growth for the
company. The fact is that WCOM will outgrow its strategic competitors
without a domestic wireless footprint. At the end of the day,
shareholders should rest easy that while WCOM prudently explores all
reasonable strategic options, none will be consummated unless the math
works or material growth enhancement adds good value.
NET/NET: WCOM continues to be one of the cheapest stock in our universe
on a P/E to growth rate basis with the best collection of assets. We are
not big on a sum of the parts analysis, however, if we separately valued
UUNET's $4 billion revenue base (the largest Internet backbone) growing
at a 60% clip, WCOM's pan-European stand alone network and its domestic
business, we would end up with a stock price target multiples of where
WCOM is currently trading.
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