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MCI Inc (MCIP) is a communications company that used to be WorldCom; the company was renamed as a result of Chapter 11 proceedings.

Essentials

Market Capitalization:  $6.32 billion
Debt:  $5.94 billion
Cash:  $5.59 billion

Share Price:  $19.89

52-week high:  $26.45

52-week low:  $12.50

Fundamental Analysis

Overview

MCI is nearly as ideal a fundamental purchase as is possible.  As a result of WorldCom's bankruptcy several key changes were made, and the company is now much more attractively positioned financially and intellectually.

Cash & Debt

MCI now has $5.59 billion in cash, and $5.94 billion in debt.  This provides the company with great financial flexibility; including the ability to dividend cash out to shareholders (the company has issued $0.80 in dividends since July).

Management

Along with the scandals surrounding WorldCom's bankruptcy came a substantial corporate reorganization.  The current CEO was previously CEO of Hewlett Packard, and before that Compaq.

Outside Help

During the company's restructuring, many specialty investment firms took large positions in the company.  Many of these firms have outstanding track records (the firm with the largest holdings as a percent of assets beat the market by an annualized 20% since inception) and are experienced in turnaround companies.  This is a strong vote of confidence for MCI.

As a result of their overweight ownership (many firms have greater than 10% of their assets invested in MCI), these firms will likely aid management in decision making.  Additionally, they will serve as corporate governors, making sure that management uses funds appropriately; generally, it does not make economic sense for a shareholder to very carefully inspect management decisions since the gains of this action will be very diffuse (he will only profit from a very small fraction of the wealth he creates).  However, in this case, many firms own a sufficient amount of the company that they have an incentive to better operations.  As a low dollar shareholder, you are able to free-ride off of their efforts.

Recent Growth

During the past 2 fiscal quarters, EPS increased from $-0.72 to $0.45.  This is an extremely rapid increase for a $19.89 stock.

Signalling

Insider Transacitons

All recent insider transactions were purchases of relatively modest amounts, and were made by all involved officers simultaneously; we view these purchases as a show of confidence in the firm rather than an attempt to profit from knowledge about strong prospects.  Nevertheless, it is a positive.

Dividends

Generally, dividends are seen as management confidence in the future cash flows of a company; empirical evidence bears this out, showing that companies that begin issuing dividends have more stable future cash flows than companies that do not.  Recently, MCI has been issuing dividends; we see this as a positive signal.

Analyst Forecasts

Analysts forecast 2005 EPS of $0.51.  We believe that, as with recent estimates, this will be beaten; during the recent two quarters, EPS estimates were beaten by $1.01 and $0.53.

During the past 90 days, analysts have greatly increased their estimates for this quarter, next quarter, this FY, and the next FY.

• This quarter:  From $-0.22 to $0.37
• Next quarter:  From $-0.36 to $0.24
• This fiscal year:  From $-1.73 to $-0.01
• Next fiscal year:  From $-1.21 to $0.53

Rising analyst estimates and positive earnings surprises are both positives for a stock, especially when they are of this magnitude.

Valuations

MCI is trading at much lower Market Capitalization / Revenue and Firm Value / Revenue valuations than its closest competitors and the industry.

We anticipate that MCI's valuations will increase as investors become more comfortable with the scandal-ridden company and believe more that the turnaround is real.

Technical Analysis

MCI has been under heavy accumulation by investors; since early July, cumulative money flow has been approximately $30 million, with roughly $20 million of that occurring in the last forty days.  The stock has not risen consistently with the money flow, and this divergence is a strong positive.

The stock gained several points last week, but this week fell slightly as it consolidated.  The pattern is a weak form of a bull flag, and is moderately positive.

Key Levels

Buy:  Market

The stock is fundamentally and technically bullish

Stop loss:  18.49

Below the lows of the first bull flag's consolidation phase; we believe the stock deserves some room to move around, since the fundamental picture is convincing

Target:  30

Valuations closer to par for the industry

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