Levy may be correct in his warnings.......LU is having problems and despite today's uptick on Spin-Off news/Verizon contract, the fact is there appears to be lot of confusion and dissaray in the LU camp.
lightreading.com
Lucent Technologies Inc. (NYSE: LU)
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A lot of people have been wondering why Lucent appears to be falling out of favor, on Wall Street and elsewhere. Lucent stock is down 23 percent for the year. Compare that to the stock of its most direct competitor, Nortel Networks lucent.com (NYSE, TSE: NT), which is up 28 percent in 2000.
While some of Lucent's business in optical components and cabling is healthy, it has been falling behind in its expansion on the next-generation networking front. Next to competitors such as Nortel and Cisco Systems Inc. cisco.com (Nasdaq: CSCO), Lucent appears to be losing the all-important race to internally develop or acquire high-bandwidth switching and routing products. And here the emphasis is on products, not technology. Lucent has always been known for developing great technology--but it's companies such as Cisco that have perfected acquiring technology and marketing it as products. Lucent's acquisition last year of Nexabit Networks for $900 million hasn't quite panned out the way it the company would have liked: The product has been scaled back (see Lucent Quiets Terabit Router Rumors ), and Nexabit founder and CEO Mukesh Chatter has left the company, after becoming vice president and general manager of Lucent core routing technologies. In fact, the Lucent networking group has experienced a notable brain drain, with a large swath of high-profile talent leaving for startups. Most notably, Curtis Sanford, president of the Lucent internetworking systems group, quit a couple of months ago.
Another sign of trouble with Lucent's networking strategy came with its recent acquisition of Chromatis Networks for $4.5 billion. In public, several analysts paid homage to the deal, but in off-the-record conversations, the same analysts ask why the company suddenly felt the need to go out and buy Chromatis after developing its own products in the same space. Lucent officials have long maintained that unlike Cisco Systems Inc. (www.cisco.com; Nasda:CSCO), it would take the internal route to an optical networking product line.
Indeed, the Chromatis deal hints at panic, but not because the price was high. Companies such as Cisco Systems cisco.com (Nasdaq: CSCO), which paid $7 billion for Cerent, and Redback Networks redback.com (Nasdaq: RBAK), with its $4.5 billion purchase of Siara, can show that these expensive stock swaps sometimes work out in the long run. The problem is that Lucent has been saying for years that it didn't need an acquisition strategy to go optical--and its sudden change of heart raises warning flags.
The optical networking market is crucial to Lucent because it is one of the sectors that shows the potential for sustained, high growth in the future.
"At approximately $45 billion in sales, Lucent's management has been trying to grow faster than its estimate of the overall market growth rate of 14% to 15% and has been having a hard time doing so, in our opinion--as evidenced by the declining quality of its balance sheet and recent disappointing financial results," wrote Steve Levy, an analyst with Lehman Brothers, in a report he issued on June 9 on Lucent.
Levy's research note on Lucent gets even scarier for Lucent shareholders. He noted that nearly all the other large communications companies: Cisco, Nortel, Motorola, ADC, and Tellabs, have been growing faster than Lucent's approximate 23 percent top-line growth rate. For example, Cisco, with 1999 revenue of nearly $15 billion, grew its top line at a pace of 53 percent; and Nortel, with 1999 revenue of $21 billion, grew at a rate of 34 percent.
"The communications technology market segment is probably accelerating its growth rate this year and is likely to reach 20% year-over-year gains-faster than Lucent management has been anticipating," wrote Levy. "Therefore, any slowdown in growth rates at Lucent suggests that the company is now losing overall market share for the first time since coming public."
There you have it--the company is simply not keeping up with the pace of growth in the industry at large. When you add to that fact that key networking talent is leaving and the company's acquisition infrastructure is not nearly as efficient Cisco's, the picture does not look pretty. Yet Lucent's stock, recently trading a price-to-earnings mulitple of 52, isn't exactly cheap.
That, in short, is why Lucent--once one of Wall Street's darlings--has become one of the unloved.
by R. Scott Raynovich, Executive Editor, Light Reading (http://www.lightreading.com) |
