When the Motley Fool Inside Value newsletter recommended MCI (NASDAQ:MCIP), I have to admit I shook my head. But, being a value investor, I promised to study the next earnings report when it arrived (which it did today).

MCI, formerly WorldCom, has been on a roller coaster since it exited bankruptcy and opened for trading at $25.45 in late January. The stock peaked at $26.90 in February, hit a $12.50 low in June, and is now trading for $17.50 a share.

MCI's stock rose when Leucadia National (NYSE:LUK), a holding company that purchased WilTel and ATX Communications out of bankruptcy, announced that it wanted a controlling interest in MCI. Leucadia, probably better known for its Berkadia LLC joint venture with Berkshire Hathaway (NYSE:BRK.A), didn't follow through. It sold its 5% stake for a $20 million profit in two months.

Sending the stock down was a recent ruling that opened the door for Verizon (NYSE:VZ), Motley Fool Stock Advisor recommendation SBC Communications (NYSE:SBC), and BellSouth (NYSE:BLS) to charge higher network access rates. That ruling caused AT&T (NYSE:T) to announce it would no longer offer new local and long-distance service in seven states.

So, with a backdrop of an acquirer that's happier being rich than as an owner and a court ruling that made the No. 1 long distance company turn its back to new business, MCI announced that revenue was down 15% from last year. A monstrous $3.4 billion "impairment charge" caused a $3.4 billion loss. Is this a value stock or a disaster in progress?

Sift through the numbers, and there are some pearls. Back out the impairment charge and MCI's operating income increased 57%, and there are clear signs that the company's cost-cutting initiatives are working. Among the positive improvements in the balance sheet is a $1.5 billion reduction in debt since last year.

MCI's biggest need is to control costs while embracing new technology. The stock sells at a price-to-sales ratio of 0.23 because investors are uncertain that the company can cut costs enough to produce significant operating margins.

MCI subtitled this quarter's press release, "Revenue stabilizing in key business segments." If that's correct, then the Inside Value newsletter has found a real value. With stability, the company's continuing cost cutting will produce much better operating margins for this former ward of the bankruptcy court.

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Fool contributor W.D. Crotty owns stock in Berkshire Hathaway, Verizon, and SBC Communications.