New MCI

[Nemesis]

http://finance.yahoo.com/q?s=MCIP&d=t

I'm attempting to learn about stocks to round out my financial education before I actually have money to invest in something. What is good and what is bad from a "value investing" standpoint of this stock http://finance.yahoo.com/q?s=MCIP&d=t

It seems to me that it's unproven track record is the biggest problem?

[GeorgeF]

MCI is very complicated due to so much of its future is tied to government actions in the US and Europe. The value of the underlyign business is less important than what the high and the holy in Washington and Brussels do.

[digdeep]

What an interesting value play! What is your reasoning and logic in looking at this - but particularly as a value play?

Couple concerns

Cell Phone industry - is seriously going to hurt these traditional phone companies like MCI and Qwest. Future success is a bit questionable.

Questionable operations - with the chapter 11 recently behind them, there is still an element of uncertainty regarding the Company's quality of earnings; why did it capitalize expenses in the first place, indicative of some operational weaknesses?

I'd would be extremely interested in your reasoning, and I will take a deeper look at the financials and company information, and try to gain any further helpful insights.

[Nemesis]

I'm a complete nooby at this so i'm posting this as an attempt to gain insight into why or why not this would be a good value play. I picked it because it had an extremely low P/E ratio and it's P/book ratio was under 1 which to me says if we cashed the whole business out we make a profit... I think the price would rise to at least it's book value? This is just my personal observation.

[TGoldman]

"For the six months ended 6/30/04, revenues decreased 17% to $10.67 billion. Net loss from continuing operations before accounting change totaled $448 million vs. an income of $282 million. Revenues reflect negative impacts from an intense competition caused by overcapacity in the industry. Higher net loss reflects an increase in interest expense."

From a "value" point of view, you have to ask yourself the question, "Are the problems that MCI is currently experiencing a temporary bump or an indication of even worse problems in the future?" A value investor would only purchase this stock if he/she were convinced that MCI's financial woes were only temporary.

I look at their financials and see negative earnings growth, negative working capital, a deteriorating balance sheet loaded with debt (Resulting in even more of the interest expenses that were warned about above), and a high debt/equity ratio. Yikes!

[BadBoyBenny]

[ QUOTE ]
I picked it because it had an extremely low P/E ratio and it's P/book ratio was under 1 which to me says if we cashed the whole business out we make a profit... I think the price would rise to at least it's book value? This is just my personal observation.

[/ QUOTE ]

I only looked for 5 seconds but something like half of their equity is in goodwill, which is probably worthless. Their actual business value is probably far less than their book value. Beware of companies with high intangibles, especially if they are not patent or brand driven companies.

- Benny

[midas]

Some valuation pointers:

1. Book value is a meaningless accounting concept. You can have $1 billion in BV, then lose your biggest customer and go bankrupt - ignore it.

2. Look an a companies Enterprise value (Market Cap + Debt - Cash) divided by Cash Flow (EBITDA). Growth companies trade above 10X and dogs trade below 5x. MCI trades around 2.5x.

3. Why would you buy any company that sells a commodity service and every year the price of this service drops due to competition?

Avoid at all costs

[digdeep]

I agree that book value can a bit deceiving, but enterprise value is simply a valuation measuring the takeover price of a company. Book does provide a reasonble place to start when determining the instrinsic value of company, but one must also evaluate other factors - like competitive position, earnings growth, historical performance, etc.

Clarification on another reply:

Book Value - is the net asset value of a firm, excluding intangibles.

[midas]

Dig:

Enterprise value is the only way to compare leveraged vs. unleveraged companies - it levels the playing field.

This is an example of why BV is not a good indicator - your company spends $1MM to write a new piece of killer software. In Year 1 you lose $1MM - your BV now is 0, the 1st day of Year 2 - Microsoft says it wants to bundle your software with the next version of Windows. BV is still 0 and you're looking at vacation homes in Aspen.

Look at any research report (except for banks) BV is rarely mentioned.

[digdeep]

Thanks for the clarification Midas. I went back and did some research, and I found that book value may be good for traditional manufacturing firms etc., those companies with large fixed asset bases, but in order to accurately determine the success and effectiveness of a Company's operations, enterprise value to EBITDA is more effective.

Though I must say: I am still trying to completely understand Enterprise/EBITDA.

Midas - Any helpful resources to better learn about this or other valuation techniques.

Thanks