MCI WorldCom’s the Right Call; Make Room for Cost Plus

MCI WorldCom (WCOM)

Jim: Mike, up first is MCI WorldCom, which is, of course, the nation’s second-largest long-distance phone company--created last year by the $40-billion merger of MCI and WorldCom.

Mike: Jim, I think you misspoke yourself right there.

Jim: How so?

Mike: Because I think calling MCI WorldCom a long-distance phone company is like calling Time Warner a cartoon company. It doesn’t really tell you what this company is and what it’s going to be.

Jim: You’re way ahead of me.

Mike: That’s because I think MCI WorldCom is, if not way ahead, well ahead of its peers in the telecommunications business.

Jim: You mean the real story with MCI is that it carries about half of all the Internet traffic through its UUNet Division. And that’s just the start, because in the next few years it’s looking to gather half of its total business from moving Internet and data traffic.

Mike: Right. In fact, if you want proof that’s where the business is going, all you have to do is look at AT&T;, which is moving into that space as fast as it knows how. But MCI WorldCom is already there. Since we spoke so highly of AT&T;’s data strategy a month or two ago, we really ought to praise MCI for what it has accomplished so far.

Jim: In the meantime, there’s been one missing link in the MCI WorldCom story, which is that it doesn’t have a wireless telephone service--cell phones, for lack of a better term.

Mike: Or at least it hasn’t had wireless thus far. But guess what?

Jim: I don’t have to guess. The word is everywhere that MCI is in talks to acquire Sprint, which not only is the No. 3 long-distance company but also has quite a sizable wireless business called Sprint PCS.

Mike: Now, we should give a little background here. MCI WorldCom is still formally headquartered in Mississippi, where its chairman, Bernie Ebbers, was a physical education teacher. He’s one of those guys who is always called a former gym teacher, although he probably only taught gym for a couple of years before he got into the telephone-access reselling business. From there, he built WorldCom into a truly global enterprise.

Jim: Right. But WorldCom really got onto everybody’s radar screens when it bought MCI. You know, Mike, this stock has had a great run-up in the last year, although it has tapered off since early summer because there was a lot of talk of price wars in the long-distance business. But I think a lot of people misread what you and I were just talking about, which is that traditional long-distance is not really the future of this company.

The stock now trades in the low-$70s, which is about 36 times its expected earnings per share for 1999. That’s not cheap by any means, but it’s not terribly expensive either for a telecom company with the kind of growth prospects I see for this outfit.

Mike: I agree. I think there’s tremendous growth potential in this company and this might be a good point to step in. The fact that MCI is moving aggressively to fill in the one real chink in its armor--the lack of wireless--tells you how much this management is on top of things.

Jim: I’m with you. In spite of all those annoying phone calls I get from MCI telemarketers at dinner time, I’d still buy the stock. Bernie Ebbers and his team have a balanced strategy of using long-distance as a cash-flow device while they move deeper into the changing world of telecom.

Cost Plus (CPWM)

Mike: Jim, our second stock today is Cost Plus. Now, we haven’t done this stock before, but it certainly has a familiar look about it.

Jim: How so?

Mike: It resembles quite a few other companies we’ve taken a look at, such as Bed Bath & Beyond. It’s a high-potential retailer that sells to people who are furnishing and refurbishing their homes.

Jim: I’ll just step in here by saying this is one of my favorite places to buy wine at very attractive prices, but it actually has a lot more going for it than that.

Mike: I hope you’re not saying that you spend a lot of time in there.

Jim: Not overly so, no. This outfit, which is headquartered in Oakland and operates nearly 100 stores in 16 states, specializes in--let’s call it unique casual furnishings, food and other merchandise for the home. About half of its store space is in California. It certainly seems to have found a niche, and it has got a lot of things going for it at the moment.

Mike: Why don’t you talk about some of those?

Jim: Sure. No. 1, there’s plenty of room for Cost Plus to expand. Second, in its fiscal quarter ended July 31, its net income rose tenfold from a year earlier, which was something of a depressed period. More important, its same-store sales, or sales at stores open at least a year, rose a very healthy 8.6% from a year earlier. That’s a very good sign.

One thing investors should keep in mind, though, is that much of the chain’s sales and earnings come in its fiscal fourth quarter, around the holidays. It’s really important that Cost Plus execute well in that quarter, but I think management has proved it has got the bases covered. I’d buy this stock.

Mike: Certainly its balance sheet tells you that this is a pretty conservative company. Long-term debt is only about 10% or 11% of total capitalization.

Jim: Investors have liked what they’ve seen about Cost Plus in the last year or two. The stock right now trades in the mid-$40s, which is about 37 times its expected earnings for its fiscal year ending in January. That’s pretty rich for a specialty retailer, but this stock has more than doubled in price in the last 12 months, Mike, and over the last three years it has nearly tripled. And that’s a helluva lot better than the S&P; 500.

Mike: It’s not getting too rich for your blood?

Jim: Not at all. By the way, I’ll point out also that the company just announced a 3-for-2 stock split that should occur around Oct. 11. That should give the stock another modest boost on its own.

Mike: Of course there’s one caveat to all this. That’s the question of whether the economy is going to continue strong, and particularly whether home sales are going to continue strong, because a lot of Cost Plus customers are people who are buying and furnishing new homes.

Jim: But it’s a little different in this case from, say, Bed Bath & Beyond or even Home Depot. Cost Plus has a unique merchandising strategy. You don’t go to a Cost Plus for furnishing whole rooms of your house, but mainly for odds and ends, things that you can use to fill in little spaces.

Once you get in there, it has all of the food and drinks and everything from picture frames to greeting cards to, you name it. So I think even if the economy turned down and housing turned down, they’d hold up pretty well.

Mike: So that’s two thumbs up for Cost Plus.

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Write or e-mail with a stock you would like to see discussed in this column. James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).