WorldCom stumbles after warning
Broker downgrades add pressure on battered stock

By Emily Church, CBS.MarketWatch.com  4:24 PM ET April 22, 2002

CLINTON, Miss. (CBS.MW) -- Shares of WorldCom sank 33 percent Monday amid a spate of negative brokerage comments after the telecommunications carrier warned sales and profits would fall short of its targets.

At least seven brokerages cut their ratings on the stock. Credit Suisse First Boston, which issued a rare "sell" -- the firm had rated WorldCom a "hold" -- told clients it has a $2 price target on the stock.

WorldCom (WCOM) plunged $1.97 to $4.01 and set a new 52-week low. The company's consumer long-distance arm, MCI Group (MCIT), shed 15 percent to $4.23.

Investors traded 255 million shares of WorldCom on Monday, the most of any U.S. stock.

WorldCom's plunge came amid sharp losses in the telecom sector after infrastructure and mobile phone maker Ericsson (ERICY) warned it expected a loss this year. Ericsson also said it planned to sell more shares to raise funds.

On Friday, WorldCom cut financial projections for 2002, citing the weak economy and lower corporate spending on data and phone service.

WorldCom cut its outlook for revenue by about $1 billion, or 5 percent, and lowered its target for earnings before interest and tax by 15 percent. It also said it would cut capital expenditures to an estimated $4.5 billion from its previous range of $5 billion to $5.5 billion.

J.P. Morgan Chase and Goldman Sachs downgraded WorldCom to "market perform" from a "buy." Merrill Lynch, like CSFB, dropped the stock to a "reduce/sell." A.G. Edwards on Friday cut the stock to a "sell" as well. Salomon Smith Barney cut the stock to "neutral" from "buy."

USB Piper Jaffray dropped the stock from "strong buy" to "outperform," while "Kaufman Brothers" downgraded shares to buy from strong buy.

Standard & Poors downgraded WorldCom's debt from BBB+ to BBB.

"We believe investors will be increasingly concerned about financing availability and cost as debt comes due, at best further diluting earnings per share," CS First Boston said.

WorldCom was the third major phone company to reduce its forecast last week. BellSouth (BLS) and Qwest Communications (Q) also cut estimates.

"Already a long-standing casualty, (WorldCom) appears to be seeking a move into intensive care," Merrill told clients. The broker said the WorldCom warning "makes it all the more likely that Verizon Communications (VZ) will be the next company to adjust downward its full year estimates."

Verizon is slated to report on Tuesday; AT&T (T) on Wednesday.

Shares of AT&T fell 5 percent to $13.75. However, some brokers said it appeared WorldCom may be losing some share to AT&T.

"We had believed, and continue to believe that business conditions in long distance have bottomed. The problem is that for WorldCom, the bottom on the profit side is deeper than we feared," Goldman Sachs said in a note to told clients.

"This appears to be driven by a particular weakness in Data/IP services, traditionally the primary driver of growth and profits for WorldCom," Goldman said. It cut the stock to "market perform."

Emily Church is London bureau chief of CBS.MarketWatch.com