Another chapter in the WorldCom ( WCOM) mystery is about to unfold as the company prepares to open its books on fourth-quarter earnings Thursday morning. After a fierce four-week selloff fueled by post- Enron accounting willies and post- Global Crossing debt jitters, not to mention a possible margin call on CEO Bernie Ebbers, observers say WorldCom will likely report that business is indeed gloomy, but nowhere near as bad as the worst-case scenario would have it. Considering how steeply WorldCom has fallen in recent weeks, that could easily spell a buying opportunity starting tomorrow. "People are running around saying the sky is falling," says Stuart Conrad of 3 Squared Capital Partners, an Atlanta-based hedge fund. "Clearly a lot of these concerns have been blown way out of proportion."
Grime and Punishment
Investors have seen half the value of their WorldCom shares vanish since the beginning of the year as the roaring momentum of panic selling was answered by only an eerie silence from management. But some observers now think the balance has tipped too far, and that with the stock falling by double digits percentagewise day after day, only the admission of the most egregious business practices would warrant the current stock level. WorldCom slid 40 cents Wednesday to $6.57 on volume of more than 130 million shares, making it the most active stock on the Nasdaq. "Does business suck? Sure. Have they been aggressive in accounting? Sure. Are they going to take some big write-offs? Sure," says Conrad, who is short the stock yet thinks it's oversold at this point. But "these things are known." "The question is what's the appropriate punishment," continues Conrad. "Let's not forget, the stock is trading at the level it was in February 1993." Meanwhile, WorldCom fans would argue that this is hardly the same company it was nine years ago. The multibillion-dollar acquisition juggernaut that rolled up 60 companies also gained a mighty customer list in the process, giving the company a hefty cash stream to the tune of $6.6 billion in operating greenbacks in the first nine months of last year. But as Qwest ( Q) and AT&T ( T) showed us last week, overcapacity and price-cutting have squeezed margins at the big telcos. By some estimates, long-distance prices for businesses have fallen 50% in the past year, while traffic volumes have also been on the slide. WorldCom shifted some of the long-distance burdens onto its consumer tracking stock, MCI ( MCIT). But since the company consolidates its financial results, the tracker is merely an accounting exercise to help investors appreciate the value of WorldCom's core business services minus slower-growing consumer sales.
And while observers agree that WorldCom may have overpaid for nearly all its acquisition by today's market standards -- it carries $50.8 billion in goodwill on its books, $26 billion higher than its market cap -- the company isn't exactly a house of cards. "WorldCom has the best global assets of any long-haul data communications carrier in the world," says Mike Kaufman with K Capital Partners, a Boston hedge fund. "It's simply impossible to think people will stop making phone calls and stop needing telecom services. "This is a growing industry over time, but there's only going to be room for two or three players," says Kaufman, who is long Sprint and has no position in AT&T or WorldCom. "In this case AT&T, WorldCom and maybe Sprint ( FON)." To be sure, it will continue to be a painful shakeout as more companies cut prices in a last-ditch effort to win business. And WorldCom has been grappling with cost reductions to balance its own aggressive pricing. Across the telecom industry last year, companies trimmed staff levels by the thousands, leaving some to wonder whether deeper cuts may be in store for WorldCom. The company already told its 75,000 employees earlier this year that there would be no bonuses or new stock options in 2002, and this is often a warm-up to more drastic measures. WorldCom didn't return calls seeking comment.
Wall Street expects WorldCom to report fourth-quarter earnings of 14 cents a share on $5.5 billion in sales, according to polling by Thomson Financial/First Call. Those numbers mark a 30% earnings decline from last year's level but a 12% increase in revenues. The fourth quarter won't likely be a big disappointment, but the big question is guidance. "Either they bring it down or no one's going to believe it," says K Capital's Kaufman. "They would certainly be doing themselves a favor if they gave a realistic number to the Street just to avoid a disappointing first quarter." Obviously, if lowered targets are the worst news coming out of WorldCom tomorrow, a lot of panic sellers may suddenly turn into opportunistic buyers.