Lucent (NYSE LU) set itself apart from other networking stocks Wednesday, after a CIBC report upgraded it while slashing ratings on Cisco (Nasdaq: CSCO) and other competitors.
CIBC World Markets analyst Steve Kamman upgraded Lucent to "buy" from "hold" based on its current valuation, and called the company "an attractive harbor in what looks to be a choppy year for the sector."
Kamman's call on Lucent puts him in a contrarian camp of analysts that are betting on a turnaround. However, many analysts have panned Lucent for repeated miscues and missing financial targets and product cycles. Lucent, which is considered a "show me" stock, recently restated revenue and cut its earnings outlook. Overall, analysts are split -- 18 analysts rate Lucent a "buy" and 17 call it a "hold."
Kamman also downgraded Cisco (Nasdaq: CSCO), along with several networking equipment companies including Juniper Networks (Nasdaq: JNPR), which was dropped to a "buy" rating from "strong buy," and Redback Networks (Nasdaq: RBAK), cut to "hold" from "buy." Lucent rose 0.13 to 16.94, Juniper rose 5.18 to 122.38 and Redback gained 5.38 to 40.81 following the reports.
Lucent: the least risky option
"Lucent looks particularly appealing if one expects (as we do) a rough year and the stock may see some appreciation for that reason alone," Kamman stated in his report.
Lucent's stock faltered in December after it warned of a wider first quarter loss, restated its fourth and said it would restructure to save $1 billion.
Kamman put a $20 price target on the stock and said that while the company has significant restructuring ahead, he is "cautiously optimistic."
"The company has turned the corner from a valuation perspective. We are, however, awaiting further clarity on long-term strategy," Kamman said
He said the company's recent restatement of fourth quarter numbers harkened a fresh start. The only risks are the coming challenges of recruiting a CEO (or CEO's), restructuring its IT systems and salesforce, and articulating a coherent strategic and operational direction.
There is plenty of hidden value in Lucent's remaining business lines, and Kamman said he would not be surprised spin-outs of the optical fiber, wireless, or circuit-switching businesses.
There are several potential catalysts ahead, Kamman said, including the Agere spin-out (expected in the first quarter of 2001), a new CEO, and the potential for further spin-outs. The spin-outs will fit in with the trend towards abandoning "end-to-end solutions," Kamman said. "We are not advocating a wholesale dismemberment," he added, but hopes for a core, "growth" company centered around optics, data, and the heart of Bell Labs with peripheral operations spun out from this core.
Redback: the odd man out
Kamman downgraded Redback to a "hold," citing a "fundamental difference of opinion" with the company on the vision of the network's future. While he sees the company reporting solid numbers for the short-term, he said long-term growth prospects are more limited due to its strategy.
"We see Redback as the ultimate "battleship" company -- selling products designed to prop up legacy networks at a time when we believe their economic and strategic foundations are already coming undone," he added, referring to his views about Cisco and others in the reshaping of the sector as a whole.
"We also have serious fundamental concerns about both of their major product lines -- DSL subscriber management systems and SONET transport products," Kamman said. He said that though the DSL subscriber management system is a solid, it's a market with strong buyer, rather than supplier, power and growing competition, and is worth only about $20 to $25 a share. He expects big competition for its SONET business following Ciena's (Nasdaq: CIEN) acquisition of Cyras.
"In a battle between Cisco, Ciena, and Redback, we expect Redback to be the odd man out," Kamman said.
Juniper makes the grade
Kamman was slightly more forgiving of Juniper (Nasdaq: JNPR) which he dropped to "buy." Kamman called the downgrade "purely a valuation call," and put 12-month price target of $140 on the stock.
"We believe Juniper's strategy is absolutely on track and its management and execution have been nearly flawless. Our concern is that the stock has very high growth expectations built in," Kamman wrote.
As Cisco guides down its own revenue estimates and finally announces its own OC-192 product in the next few months, Juniper will be impacted, he said.
He has remodeled growth expectations based on the expectation that the Juniper/Cisco duopoly is dead; Kamman sees at least five new competitors entering the router market, and expects at least one or two to gain traction.
He also noted that Juniper will need to transition to terabit routing in about 12 to 18 months, and there have been questions as to whether Juniper will have to buy a terabit routing solution.
Juniper is trading at 143 times 2001 earnings, and though there is "nothing inherently wrong about a high multiple, it does mean strong sensitivity to future growth expectations," Kamman said.
"We believe more attractive entry-points may be near at hand," Kamman added.