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Technology Stocks : Lucent Technologies (LU)
LU 2.495+0.2%12:27 PM EST
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To: MRE who wrote ()8/8/1999 3:50:00 PM
From: John Malloy  Read Replies (1) of 21876
 
Everyone wants to know what Lucent is worth. Here's how I value Lucent, based primarily on my experience valuing acquisition candidates during my career with Amoco. Putting a realistic value on a growth stock like Lucent requires forecasting how Lucent's growth rate will inevitably slow and rate of return and the price/book ratio fall as Lucent's growing markets mature. I forecast Lucent's growth rate, return on equity, and price/book ratio by drawing free-hand forecast curves on a sheet of graph paper. I twist and bend these curves any way I want to describe how I expect these basic parameters to change. And I can translate these free-hand forecasts into a dollars-and-cents value for Lucent.

My free-hand forecast curves have Lucent's growth of equity/share gradually falling from the current 34%/yr to 22%/yr. in five years, and the price/book ratio falling from the current 15 to 9.8. That forecast leads to a stock price of $91 one year from now, and $181 in five years. I forecast Lucent will earn a return on equity sufficient to fund that growth and maintain a 9% dividend payout.

Based on those forecasts, Lucent is worth $85 to an investor in the 28% federal and 6% state tax brackets who insists on a minimum after-tax return of 12%, and who holds the stock for five years. Raising the minimum return to 15% lowers Lucent's value to $72; lowering the minimum return to 10% raises Lucent's value to $96. Buying Lucent at $63 and holding for five years should yield this investor a 17% after-tax return.

See analyticalbooks.com for details. I used Microsoft as an example on the web site and found Microsoft was worth $80 for this same investor.The web site shows the range of minimum acceptable returns over which this investor would find Microsoft worth more than it costs.

John Malloy
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