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Analysts punish telecoms
WorldCom's news deals a devastating blow to an already struggling sector.
June 26, 2002: 4:06 PM EDT

NEW YORK (CNN/Money) - Wall Street analysts punished WorldCom Group and the telecommunications sector Wednesday, following WorldCom's announcement of the biggest episode of fraudulent bookkeeping in history.

"We expect WorldCom's fraudulent accounting will bring the whole [wireline telecom] group down," J.P. Morgan Securities analysts Marc Crossman, Jonathan Chaplin and Brian Hong said in a research note.

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WorldCom said late Tuesday that it had discovered improper bookkeeping and would have to restate results for 2001 and the first quarter of 2002, cutting earnings by about $4 billion.

Though shares of WorldCom (WCOM: Research, Estimates) and its subsidiary MCI Group (MCIT: Research, Estimates) were halted in early trading, broader markets, already weakened by an ongoing parade of corporate scandals from Enron Corp. to Tyco International Ltd. (TYC: down $1.55 to $12.00, Research, Estimates), fell.

Merrill Lynch removed its estimates for WorldCom results, reiterated its "sell" rating on the stock and echoed J. P. Morgan's gloomy outlook for the entire sector.

"With three major U.S. telecoms under Securities and Exchange Commission investigation, we thought little more could happen to dampen already miserable investor sentiment in the space," analyst Adam Quinton wrote. "Now events at WorldCom leave us virtually lost for words."

Among the other telecoms under SEC investigation are Qwest Communications (Q: down $2.40 to $1.79, Research, Estimates), Global Crossing, and Metromedia Fiber Network.

Bear Stearns said it had suspended its ratings on WorldCom and MCI Group.

"Telecom industry health is apparently even weaker than previously thought," Bear Stearns analyst Robert Fagin wrote in a note.

Fagin pointed out that a WorldCom bankruptcy, which is widely expected, could have an impact on its suppliers, including Nortel Networks (NT: down $0.14 to $1.47, Research, Estimates), Juniper Networks (JNPR: down $1.16 to $5.13, Research, Estimates), Tellabs (TLAB: down $0.57 to $5.78, Research, Estimates) and Cisco Systems (CSCO: down $0.02 to $13.43, Research, Estimates).

Reuters reported that Robertson Stephens had cut its rating on WorldCom and MCI to "market underperform" from a previous "strong buy" rating for WorldCom and a "market perform" rating for MCI.

Kaufman Brothers cut its ratings for WorldCom and MCI to "hold" from "buy" and suspended its price target for WorldCom shares.

And credit-rating agency Moody's cut its rating for WorldCom to "Ca," its second-lowest rating, from "B1."

Fitch cut its rating for WorldCom to "CC" from "B," a level well below "junk" status, saying there is a high risk that WorldCom could default on its $30 billion in debt.  Top of page