Lehman upgrade boosts Lucent

Shares of the long-suffering maker of telecom equipment rose as much as 8.9 percent to $7 before settling a bit, after Lehman analyst Steven Levy raised his Lucent rating to "strong buy" from a "neutral" advisory and set an 18-month price target of $18 per share. Shares closed up 24 cents, or almost 4 percent, at $6.67.

Lehman's upgrade comes a day after Lucent reported fiscal third-quarter results and announced another round of layoffs that could result in up to 20,000 job cuts.

Levy cited five reasons to be optimistic about Lucent:

•  Better balance sheet. Lucent's receivables dropped 25 percent since the end of March, and days' sales outstanding fell to 83 from 97. Those figures suggest the company is successfully trimming weak customers unable to pay their bills. And the company showed "restraint" in financing its customers' purchases, Levy said. Accounts receivable and vendor financing as well inventory levels should keep improving over the next few quarters, Levy said.

•  Improved cash and debt picture. Lucent has announced or undertaken financing agreements and sales of business and factories that add up to more than $4 billion. The company also shed $2.5 billion in debt with the spinoff of Agere Systems. "A cash crunch is not likely anytime soon," Levy wrote.

•  Faster cost-cutting. Lucent cut more jobs than expected in the latest quarter, and its second round of job reductions through voluntary retirement was finished in just one month.

"A sense of urgency has arrived at Lucent that we have never seen before," Levy wrote. "The fact that the company is now planning a second phase to its restructuring is even more evidence of a proactive move...Investors should note that in the past it would have been difficult to use the terms proactive and Lucent in the same sentence."

•  The stock price can't get much worse. Lucent's 58 percent ownership of Agere is worth $1.63 per Lucent share, based on Tuesday's closing price for the spinoff. That means that in the eyes of Wall Street, the rest of Lucent isn't even worth next year's estimated sales of $25.8 billion, according to Levy's projections. "This is about as low a valuation as we would expect the company to sell for during its turnaround efforts," he said.

•  Sentiment can't get any worse, either. "The perception of Lucent is finally almost uniformly negative," Levy said. "This aspect of the story reminds us of the inverse situation two and a half years ago when we were one of the lone negative voices on Wall Street. We believe, however, that the reality is that the worst is behind the company."

Lucent Stock price from July 2000 to present.
Source: Prophet Finance

Although several analysts praised Lucent for its balance sheet improvements, few were as optimistic as Levy about the prospects for Lucent shares. Goldman Sachs analyst Natarajan Subrahmanyan was worried about the difficulty of predicting Lucent's near-term performance.

"Due to the multiple moving parts created by restructuring and division sales, the lack of visibility into Lucent's segments, and the cloudy outlook for telecom, it is extremely challenging to estimate future results with any level of accuracy, or define a clear path to profitability," wrote Subrahmanyan, who lowered his earnings estimates for Lucent.

Merrill Lynch analyst Michael E. Ching stuck to a intermediate-term rating of "neutral" on Lucent and now sees the stock as riskier than before.

"Some may have thought Lucent would be the first to recover," Ching said. "But with today's announcement, we see that the remaking of Lucent is just beginning."

Ching rates Lucent an "accumulate" for the long term. And Levy's upgrade is also based on a long-term view of the company.

"We don't mind being early and jumping in before seeing the positive impacts of an accelerating restructuring effort," Levy said. "Other than steady and noticeable improvements on the balance sheet, starting with the June quarter, we are not counting on any major catalysts to move the stock higher...More likely, however, is the scenario, where patient, value-oriented investors are likely to be rewarded over time."