Wonder what Lucent is worth? Here's one way to look at it:
Lucent's equity/share has grown at a steady 54 %/yr. since 1997. There is still a lot of growth in Lucent's business, but growth has to slow eventually. Forecasting growth requires balancing the long-run potential of the business against the realization that Lucent can't grow 54 %/yr. forever.
For the ultimate in flexibility, I prefer to forecast by drawing smooth curves on a sheet of graph paper. My current forecast curve has growth beginning at the current 54 %/yr. and slowing to 52.5 %/yr. in one year, to 50.7 %/yr. in 2 years, and to 34.6 %/yr. in 5 years. That growth projection brings equity/share up from $5.41 today to $9.22 in one year, $15.41 in two years, and $56.18 in 5 years.
At the current $53/share, the price/book ratio is 9.8. That ratio should recover somewhat if Lucent reports better performance later this year, but eventually it has to fall as growth slows. It will probably fall faster than the growth rate because investors will anticipate the slowdown in growth. My smooth-curve projection has the P/B ratio rising to 11.9 in one year, then slipping to 11.2 in 2 years, and to 6.9 in 5 years. The combination of the growth and P/B projections leads to stock prices of $109 in one year, $173 in two years, and $389 in 5 years.
An investor who insists on a 12% after-tax return can afford to pay $90 for Lucent if he intends to hold it one year, $120 if he intends to hold it 2 years, and $170 if he intends to hold Lucent 5 years.
For every one percentage point increase in the minimum after-tax return an investor insists on, he has to lower the most he can afford to pay by $1.30 if he intends to hold Lucent one year, $3.32 if he intends to hold it 2 years, and $10.53 if he intends to hold Lucent 5 years.
My conclusion: Lucent is a buy at $53/share.
These estimates are extremely sensitive to the P/B forecast. If Lucent has more bad quarters, the P/B ratio will be much lower than I have forecast.
John Malloy |
