Big Stocks That Keep Getting Bigger

Kiplinger's Personal Finance Magazine, April, 1999 by Manuel Schiffres, Brian P. Knestout

An even greater opportunity lies in the $300-billion market for selling equipment to telecommunications providers. As use of the Internet grows, so does spending on Internet infrastructure by phone companies, cablesystem operators and Internet service providers. In the quarter ended January 23, orders from such businesses leaped 50% from the year-earlier period. Cisco recently announced significant deals with Sprint, AT&T and MCI WorldCom (see www.cisco.com).

Cisco is also growing through acquisitions (four were completed in the last quarter alone) and by constantly introducing new products, including 13 last quarter. Of particular importance, says Janus fund's Craig, Cisco has an 18-month lead on its rivals by having developed a switch that permits the routing of both voice and data traffic on a single system.

As is true of the other great growth companies, the market's estimation of Cisco's stock value seems off the charts. It sells for 61 times estimated earnings of $1.63 for the year ending January 2000 (Cisco is on a July fiscal year). That's the going price for expected long-term earnings growth of 30% a year. Craig suggests that investors buy Cisco shares when the market in general, or the technology sector specifically, experiences a correction--which seems to occur about once a year.

Benefiting from soaring demand for data services and international deregulation, MCI WorldCom (WCOM, Nasdaq, $79) "is perhaps the best-placed of the major U.S. phone companies to capitalize on the growth opportunities in the industry," says J.P Morgan analyst Simon Flannery.

The purchase last fall of MCI Communications by WorldCom brought together MCI's long-distance presence and WorldCom's own toll services, as well as its ventures in local phone service and access to the Internet. The company, with a market capitalization of $150 billion, is enjoying strong demand for private lines, mostly for Internet and data services. And growth at UUNet, the Internet service provider that WorldCom acquired in 1996, "shows no signs of slowing, except for physical-capacity constraints," says Morgan Stanley Dean Witter analyst Stephanie Comfort. The company should alleviate the capacity crunch this year, she adds. All in all, says Deutsche fund manager Moltz, "the company is positioned across a broad spectrum--local and international, data and voice and Internet."

The other key issue affecting the bottom line is whether the company will succeed in achieving its goal of wringing out $20 billion in merger-related cost savings over the next five years. Bullish analysts are betting that MCI WorldCom (www. mciworldcom.com) can do it. On average, they expect earnings to soar to $1.97 per share in 1999, from 67 cents last year, and to $2.84 in 2000. "If they can execute their plan, they're going to have phenomenal growth," says Segalas, the Harbor fund manager. "I'm betting that they will." They had better: The stock sells at a rich 40 times '99 profit estimates.

CONSUMER GIANTS

Coca-Cola hasn't given off much fizz lately, profits for the world's biggest soft-drink company actually fell a tad in 1998 as the company struggled against the effects of a strong dollar and lackluster sales in the overseas markets that hold much of its growth potential. For all of 1998, Coke's share price eked out a pitiful 31-cent rise. But the good news is that, relative to the market, Coke (KO, NYSE, $64) is as cheap as it has been in years, contends analyst Jennifer Solomon of Salomon Smith Barney, who adds: "It's important to buy fundamentally strong companies when they are out of favor."