This article is worth a read...it compares LU and CIEN
2/27/98 N.Y. Times News Serv. (Page Number Unavailable Online)
1998 WL-NYT 9805705800
New York Times News Service
c. 1998 New York Times Company
Friday, February 27, 1998
Market Place: For Lucent Stock, How High Is Too High?
By SETH SCHIESEL
In the telecommunications-equipment industry, as in many others, biggest is
often best. But telecommunications investors looking for quick profit may not
want to apply that maxim just now.
There has been a telling divergence in the recent financial fortunes of
Lucent Technologies Inc., the biggest North American maker of gear for
communications networks, and those of Ciena Corp., one of Lucent's smaller
rivals.
Thanks to its torrid stock, Lucent has packed on about $20 billion in value
since the middle of January, bringing its market capitalization to about $70
billion. Over a similar period, Ciena's market value shrank by about $2.3
billion, to about $3.7 billion.
But somewhere along Lucent's 40 percent rocket ride and Ciena's 38 percent
fall, investors have appeared to get a bit overexcited about both companies'
near-term stock prospects. Lucent's stock has already passed or come close to
the targets set by many financial analysts for the end of this year. Some of
those analysts have raised their target, but others now question whether the
stock can support valuations far higher than it has borne in the past.
Ciena's shares are not quite in the bargain bin. But they have been
discounted to the point where their price does not appear to reflect the
company's growth prospects.
Ciena is a leader in one of the few precincts of the telecommunications
equipment world where Lucent is not a dominant player. Ciena, of Linthicum,
Md., makes advanced gear that allows phone companies to transmit much more
information over their fiber optic networks. Called wave division multiplexers,
expensive boxes like those made by Ciena generally allow carriers to increase
the capacity of their systems by as much as 16 times.
Lucent does not now offer much in that field, but last month it said that by
the end of the year it would introduce a multiplexer that increases capacity 80
times. That could trump Ciena, which plans a 40-times product soon, but has not
announced plans for an 80-times multiplexer.
In another blow, Ciena disclosed last Friday that a major customer, Worldcom
Inc., intended to scale back its orders.
The Lucent and Worldcom announcements quickly depressed Ciena's stock price.
Still, Lucent's announcement is merely a plan. The company has a fine track
record of delivering on its promises, but the landscape of high technology is
littered with unrealized intentions. Steven D. Levy, a technology analyst with
Salomon Smith Barney, is convinced that Ciena will sign other clients to more
than make up for the loss of Worldcom orders. And many analysts expect Ciena's
revenue to increase to more than $500 million this year, from $373.8 million
last year.
Ciena's stock, which went public at $23 a share a year ago, closed on
Thursday at $41.4375, or about 30 times estimated earnings, far below its high
last month of $63.625.
Levy's confidence in Ciena's earnings power is not unusual. Wall Street
research analysts are almost preternaturally optimistic. What is unusual,
though, is Levy's willingness to speak at all critically about the levitation
of Lucent's stock. "Frankly, I think Lucent is getting a bit ahead of itself,"
he said.
The stock is certainly getting ahead of its traditional valuation of 20 to 30
or so times projected earnings. The average profit estimate among analysts
polled by First Call is $3.10 a share for Lucent's fiscal year ending in
September. (Levy is one of the real optimists, estimating $3.20 a share).
Lucent, which was priced at $27 a share at its initial public offering in April
1996, closed Thursday at $108.75, a multiple of 35 based on projected earnings.
Such heights can be difficult to maintain. Lucent's long-term prospects
remain rosy; the company is one of the giants of its industry, and it is
getting leaner. But it would be hard to expect the company's current run-up to
continue at its current breathtaking pace, if at all.
In July, Lucent traded as high as 38 times what the company eventually would
earn for the year. It tailed off very quickly thereafter.
Last month, Lucent beat Wall Street's quarterly earnings estimate by 13.2
percent, showing that fears that telephone carriers intended to generally slow
their capital spending were unfounded. The annual estimates rose. But the
shares rose even faster, and not so often in great spurts as in steady strides.
Perhaps as important for the company's share price was its announcement last
week that it intended to split its stock 2-for-1 in April. Because of its
legacy as part of AT&T, Lucent is the second most widely held stock in the
country. Sixty percent of its shares are owned by individual investors, who
generally put more faith in the power of stock splits than do institutional
holders.
Lucent is now trading at a huge premium to other big telecommunications
equipment makers like Nokia of Finland (27) and Northern Telecom of Canada
(28). The only one that comes close is Ericsson of Sweden at 33, and Ericsson
is much more heavily involved with wireless communications than is Lucent.
(Ericsson is also much more heavily in Asia than Lucent.)
Donald K. Peterson, Lucent's chief financial officer, says the company
deserves a high valuation because it consistently beats earnings estimates.
Lucent thinks it no longer should be compared merely to its industry rivals.
Senior executives say more appropriate peers would be companies like Coca-Cola
and Microsoft. Peterson suggests that investors think of Lucent as they would a
drug company: steady and reliable.
"We have with the drug industry a very high-quality demand pattern," he
said. "The drug companies know we are all going to get old and need help. I
believe it's reliable that the world will need more phones."
Fair enough. Venture a comparison, then, of Lucent and Merck & Co., the drug
maker.
The companies are roughly the same size, have been growing at a similar rate
and each is a leader in its industry. Lucent had revenue last year of $26.4
billion, up 33 percent from 1994. Merck had sales last year of $23.7 billion,
up 39 percent from 1994. Lucent's stock has had a strong run, as has Merck's,
gaining about 40 percent since November.
Merck's shares closed at $126 Thursday, a forward-earnings multiple of 29.
Were Lucent's shares trading at the same valuation, they would have closed
Thursday around $89, or 18 percent off the current price.
23:53 EST FEBRUARY 26, 1998
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