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Technology Stocks : Lucent Technologies (LU)

LU 2.890

+10.3%

Feb 6 9:30 AM EST

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To: KYA27 who wrote (10275)	10/19/1999 10:07:00 AM
From: Bindusagar Reddy	Read Replies (2) of 21876

07:28am EDT 19-Oct-99 Warburg Dillon Read (Nikos Theodosopoulos) LU LU: UPGRADING TO STRONG BUY SUMMARY: We are upgrading Lucent to Strong Buy from Buy. Our price target remains at $82, based on 50x our calendar 2000 estimate of $1.65. We believe recent weakness in the stock amid investor concerns about the September quarter and fundamental outlook for the company are unwarranted. The stock is trading at a 20%-25% discount to NorTel and a 45% discount to Cisco. We view this relative valuation discrepancy and our opinion that the company's fundamentals have not changed as a great buying opportunity. HIGHLIGHTS: Stock Weakness: Lucent's stock has significantly under-performed other large global leaders in telecom equipment over the past couple of months. We believe this under-performance has been based on extreme negative psychology on the company's September quarter earnings report due next Tuesday as well as a perceived weakening of the company's fundamentals. We believe these concerns are ill-founded and view this weakness as a great buying opportunity. The relative valuation to the peer group also suggests there is material upside in the stock. Comfortable with September Quarter Earnings Report: We believe Lucent could exceed our estimate for the September quarter and possibly achieve the consensus estimate of $0.29. We are confident that Lucent will also achieve our revenue estimate of $10.3 billion in the quarter. Finally, we expect Lucent to also show improvement in the balance sheet and cash flow generation in the September quarter. We expect AR DSOs to improve from the 93 days reported in the June quarter and we expect inventory turns to improve from the 3.7 turns in the June quarter. We also expect Lucent to remain positive on its outlook for the next fiscal year. Sector Remains Strong: Our research suggests that the fundamentals in the telecom equipment industry remain solid. Lucent continues to show solid growth in its traditional circuit switched businesses while also showing growth of close to 30% in data networking (i.e. Ascend), wireless and optical networking. New products in broadband access such as the Stinger DSLAM should improve the company's positioning in the DSL equipment market. International sales continue to growth materially faster than the U.S. and we expect that to continue into 2000. The company is taking share in South America and Asia, which were not major contributors in the past. Trading At a Discount: Lucent is currently trading at 34.5x calendar 2000 earnings. This compares to 43.8x for NorTel (NT-Buy-52), 63.6x for Cisco (CSCO- Buy-67) and 38.0x for Nokia (NOK-Buy-95). The 20%-25% discount to NorTel and the 45% discount to Cisco is an all time high for Lucent. While we think Lucent, Cisco and Nortel are all well positioned to benefit from the global trends in telecom equipment spending and the convergence of voice and data networks, the current relative valuation and our view that the recent weakness in the stock is unwarranted moves us to a rare Strong Buy upgrade.

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