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THE DAY AHEAD: Why gamble on Lucent shares now?

The debate over Lucent Technologies (NYSE: LU) is evenly split, but some investors have concluded it's time to take a chance on the stock. Don't be so quick to buy Lucent shares without evidence of a turnaround.

Following Lucent's announcement that it would restructure, investors reckoned the worst was over for the struggling telecom equipment vendor. Shares moved up about 7 percent in early trading Wednesday. Lucent closed up about 4 percent. After all, things couldn't get much worse, right?

Well, maybe. Lucent has shown us time and time again that things can get much worse. Lucent was a bargain at $40, a bargain at $30 and a bargain at $12. See the pattern here?

As you analyze Lucent's prospects be sure to take your time making your decision. There's no rush and Lucent will have plenty of opportunities to win you over. For now, Lucent is knee-deep in a restructuring that may, or may not, improve operations.

"The real key here is that Lucent is taking its medicine," said Eric Buck, an analyst with Wasserstein Perella Securities. "Now they have to follow through and create better business practices."

In other words, Lucent took a baby step on the comeback trail.

Lucent could emerge leaner and meaner. Or it could cut into muscle and forever be a loser to the likes of Nortel and Cisco.

We just don't know at this point. And even worse -- Lucent's management doesn't know either.

Most analysts shrugged off the fact Lucent missed first quarter estimates that were lowered four times. Sales came in at $5.8 billion, well below expectations. Lucent said it was being pickier about what contracts it chased.

There is some merit to that argument, but the company's outlook was a bit scary. Management has no idea how it will do in the second quarter. The only thing that Lucent is sure of in the second quarter is the size of its restructuring charge -- $1.2 billion to $1.6 billion. Lucent's restructuring may pay dividends in the second half, but only if the company executes well.

"We expect sequential improvement on the top line and sequential improvement on the bottom line," said Lucent CEO Henry Schacht. "That's the best guidance we can give at this time."

Gee thanks. Nice to know Schacht thinks Lucent will improve, but the expectations are already as low as they can go. Nevertheless, plenty of analysts maintain that Lucent is a "buy." These "buy" recommendations have little to do with Lucent's performance as a company. Most supporters point to a Lucent's upcoming IPO of microelectronics unit Agere as a reason to own shares. Others maintain that Lucent is simply too cheap to ignore.

But it's not hard to find folks looking solely at Lucent's business fundamentals -- they're the vocal "neutral" rating crowd, which started throwing eggs at Lucent's quarter Wednesday afternoon.

While acknowledging a likely Agere-inspired run-up, Jim Stone, an analyst at Stifel Nicolaus, said that Lucent will be spinning off a big source of its profits with its chip unit. It will be missed.

"The company has strong assets in its customer relationships and Bell Labs engineering, but it is taking a long time to unlock them," said Stone. "We would prefer to wait until there is better visibility on the turnaround before adding to growth positions."

B. Alexander Henderson, an analyst at Salomon Smith Barney, had a few interesting points. He noted:

  • Lucent's loss should "stun even the most pessimistic observers," he said. Lucent's loss of 30 cents a share was bad, but not as bad as it could have been. Henderson notes that Lucent's tax line included a $864 million credit against the operating loss, which equals a 25 cents a share offset to the operating losses. Without that credit, Lucent had a pretax operating loss of $1.86 billion, or 55 cents a share.

  • Revenue is likely to be down at a double-digit clip through all four quarters of 2001 year over year. "We think the decline is faster than even the most jaded analyst would have expected," said Henderson. He doubts that Lucent will be able to grow sales because it has cut back on vendor financing and discounts. Schacht's outlook merely called for sequential improvement in the financials.

  • Nortel's (NYSE: NT) revenue increased by the same amount Lucent's declined. Nortel is No. 2 in market share. Henderson said this trend could continue, especially since Lucent could realistically fall short of the Street's already lowered targets. "We think the losses in the fiscal second quarter could be substantially larger than the Street is currently forecasting," he said.

    Simply, put Lucent is barely a wait-and-see stock at this point. And you should wait a little longer for more evidence that Lucent is on the right track.TDAIN

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