The Starting Line: Lucent still has a ways to go

Maybe Lucent Technologies shares can only go up, but that doesn't mean it's going to happen anytime soon.

3 min read
Maybe Lucent Technologies shares can only go up, but that doesn't mean it's going to happen anytime soon.

Shares of the telecom-equipment vendor rose Wednesday and Thursday after Lehman Brothers analyst Steven Levy upgraded Lucent to "strong buy" from a "neutral" advisory. The move drew attention not only because Lehman is a prominent research company, but also because Wall Street analysts rarely change their ratings so dramatically; research houses typically will go to an intermediate rating such as "buy" before going to "strong buy".

In some ways, the reactions to Lucent's latest report showed a reversal of roles. Many stock-oriented observers, who usually focus on earnings and revenue predictability, touted Lucent's balance sheet.

Meanwhile, bond watchers, who usually bury themselves in the minutiae of assets, receivables, liabilities and cash holdings, largely frowned on Lucent's second-quarter because of sales concerns.

Levy's reasoning is straightforward. Lucent continues to hack away at costs through new layoffs and outsourcing pacts. The company recently carried out or announced several deals that will bring in billions of dollars in cash. And most important, Lucent's fiscal third-quarter balance sheet indicates that the company is cleaning up problem accounts, which were at the root of the company's initial woes.

Lucent falloff
Stock price from July 2000 to present.  

Source: Prophet Finance

Standard & Poor's may also change its Lucent rating by more than one increment. But S&P's credit rating arm expects to move in the opposite direction from Lehman Brothers; S&P plans to cut Lucent's rating, which is already at junk bond levels.

"A deteriorating business environment has not enabled Lucent to achieve sequential revenue growth, which has led to the current planned charge," S&P said in a statement this week.

The credit rating agency is also worried that the cash Lucent will get from the sale of its fiber business will be consumed by the costs of restructuring moves such as job cuts.

Merrill Lynch's manager of U.S. high-yield research, Kenneth R. Goldberg, believes Lucent is gradually improving. But his optimism remains tempered, judging by the title of his most recent report, "Lucent Technologies: Still A Lot Of Work To Do."

No analysts disputed Lehman Brothers' assertion that Lucent is moving in the right direction. But no analysts outside of Lehman were willing to put strong faith in Lucent's stock just yet.

"We don't see any significant catalysts for the company's stock in the near future," Gerard Klauer Mattison analyst Charles A. DiSanza said. "We feel the company must prove that its restructuring program is really working by consistently improving over the next several quarters."

History remains Lucent's biggest perception problem. The company in the past has burned many people with false hopes--including Lehman's Levy, who once upgraded Lucent just two months before it issued the earnings warning that sent shares gradually slumping for the last 19 months.

At a single-digit share price, Lucent shares don't seem so risky this time, Levy believes. After all, the company's revenue growth--the area of main concern to doubters--could be zero next year, and the current stock price would still translate into a price-to-sales ratio of less than one, or extremely cheap compared to major telecom-equipment stocks.

But skeptics believe the anemia of the overall telecom and network-equipment market, combined with Lucent's record of failure in the recent past, make the stock too dangerous to be worth buying. Even if Lucent solves all its problems--and even company boosters don't think that will happen quickly--demand for anyone's communications equipment is much softer than it was a year ago.

Lucent's stock price might look cheap, but no one can say when the economy will revive, or if communications companies will flock to Lucent's products once the economy does recover.

"While we feel that Lucent's recent pruning efforts...are indeed positive and much needed steps, we remain uncertain about the timing of a revenue recovery to bring the company to its planned calendar year 2002 profitability," said Adams, Harkness & Hill analyst James Kedersha. "Given the market uncertainty, combined with Lucent's own internal challenges, we feel it is too soon to call this a value-play."

In other words, Lucent may have traveled far, but not nearly far enough.