Computers: Cisco, Lucent or Nortel: Which to Buy?
Dave Sterman, Director of Online Research (7/29/99)
For the last several years, investors have scratched their heads trying to decide whether to invest in Cisco Systems (NASDAQ:CSCO - news) or Lucent Technologies (NYSE:LU - news) . Cisco, which made its name in the field of data networks has been increasingly marching towards the world of telephone systems. At the same time, Lucent, which was born and bred in the telephone equipment niche has been sashaying over to the world of data networks.
Based solely on the measure of sales growth, Cisco is the hands down winner. Over the last five years, sales have grown 67% annually. In that period, sales at Lucent have grown 11%. That's because data networks have grown at a rapid clip while spending on phone systems has been the result of systems upgrades. But Lucent, with $30 billion in sales in Fiscal 1998 is still nearly four times larger than Cisco. The takeaway message: Large phone networks are still spending big chunks of dough.
Soon enough, though, the distinctions between voice and data networks will blur, making Lucent and Cisco truly comparable competitors. "Right now, those firms have only 10% overlap in terms of revenues," says CS First Boston's Jim Parmalee, adding that "that figure is sure to rise." And thanks to last year's acquisition of Bay Networks, Nortel (NYSE:NT - news) is emerging as a key competitor in the new voice/data world (Nortel conveniently slots halfway between the two others with $18 billion in sales last year).
For now, Lucent (14% market share) and Nortel (9%) still rule the roost in phone networks market. Cisco's 2% market share still trails, but should climb steadily in the years to come, according to Parmalee -- but not at the expense of the two telephony titans. "When you look at Alcatel (NYSE:ALA - news) and Siemens (NASDAQ:SMAWY) , these guys can take serious market share," he says. Parmalee specifically cites emerging markets in Asia and Latin America as key opportunities for the domestic players.
Parmalee figures that Lucent and Nortel are still better hedged for growth, thanks to a broader product offering. Strength in optical equipment, wireless networks and traditional phone equipment outweigh Cisco's strength in data networks, he says.
One of the reasons analysts have failed to articulate the distinctions between these firms is the differentiated nature of the industries. Most analysts follow either phone companies such as Lucent or Nortel, or data folks such as Cisco. In his universe of phone stocks, Parmalee favors Lucent, which he rates a Strong Buy, though he may soon be inclined to bump up his Buy rating on Nortel. "They've been in a transition mode but they're becoming more attractive," he says adding that "if people are concerned about interest rates, then they should stick with Nortel as it has a lower price-to-earnings multiple."
Which stock you choose to own may come down to your take on the future of voice and data networks. If you believe that existing phone companies such as AT&T (NYSE:T - news) will dominate the increasingly integrated voice and data systems, then you should stick with Lucent or Nortel. "Carriers don't want to have to junk their huge investments in existing systems," says A.G. Edwards' David Heger. The analyst adds that "Cisco is the better choice for start-up carriers that have no system in place."
On the international front, that could play right into the hands of Cisco. Many emerging markets have antiquated phone systems and may be inclined to junk the whole set-up for new state-of-the-art systems. And with many international phone companies losing their monopolies, new competitors are expected to emerge. "A lot of the start-up activity will take place in emerging markets," says Heger.
In terms of valuation, Heger is more cautious. He currently rates both Lucent and Nortel as Maintain Position. "If the stocks pulled back a bit, I'd be ready to upgrade my ratings," he says.
Bottom Line:
None of the three stocks in question are cheap. And thanks to their high P/E's, each one would be vulnerable in a broader market correction. But continued heavy spending on phone and data networks is a virtual certainty. No matter which horse you rise, you're likely to do well over the long haul.
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