MSDW: rated LU ST BUY, $85 tgt
MORGAN STANLEY DEAN WITTER's 8/11/00 Excerpts follow:
Company Description
Lucent Technologies, spun off from AT&T in 1996,
combines AT&T’s former systems and technology units
with Bell Labs’ research and development capabilities.
Lucent is a global market leader in the sale of public
telecommunications systems and software, and supplies
most of the world’s largest network operators. Lucent also is
a global market leader in the sale of business
communications systems, and provides microelectronic
components to manufacturers of communications systems
and computers.
In March, Lucent announced a spin-off of its Enterprise
business. The new company, Avaya, will contain the
company’s PBX, Systemax business cabling, and LAN-based
data businesses. The spin-off should be completed by
the end of September. Also, Lucent expects to spin-off the
optoelectronics components and integrated circuits portions
of its microelectronic business in early 2001. The remaining
company (to keep the name Lucent) will focus on optical
networking, Internet infrastructure, semiconductors, data,
and wireless access solutions, and design and consulting
services.
Valuation
We rate LU Strong Buy, with a target price of $85 per share.
We regard Lucent as the core holding in the telecom
equipment universe due to its leading position in broadband
and wireless Internet infrastructure products, and its
relatively low trading multiple of about 30 times our fiscal
year 2001 EPS estimate. Upside to our revenue and EPS
forecasts could be driven by faster a ramp-up of OC-192
optical systems sales, stronger than expected sales of data
networking, wireless systems or professional services
products, or operational restructuring of the optical network.
In our view, LU is suitable for investors with a tolerance for
the price volatility associated with technology stocks.
Key Investment Positives
· Focus on network solutions. We believe that Lucent’s
position as the leading provider of carrier networks to
telecommunications providers is the single best reason to
own the stock. In our view, Lucent realizes that the future
network is data and that voice will be a subset. The recent
introduction of new Internet protocol (IP) products should
enable Lucent to build the next generation of data/voice
networks, as well as enable the evolution of existing
networks, in our opinion.
· Favorable demand trends. Growth in second telephone
lines, global wireless system deployments, and increased
software needs is holding up well, in our view. In addition,
new nontraditional customers such as the competitive local
exchange carriers (CLECs) are growing rapidly.
· New products creating market opportunities. We believe
that products from Lucent’s recent acquisitions have been
well received. In our view, carriers worldwide are looking to
their traditional central-office-switch and software providers
to lead them to the next generation of infrastructure that will
encompass voice, data, and video.
· Recent IP acquisitions . . . Lucent recently agreed to
purchase Nexabit, a privately held start-up developer of high
performance IP wide area network switching equipment.
This acquisition positions Lucent as a provider of next-
generation IP networks. Also, Lucent plans to acquire
Spring Tide Networks, a privately held developer of an IP
Service Switch (IPSS). We believe Spring Tide is an
important addition to Lucent’s access product line and
enhances Lucent’s ability to provide one-stop shopping for
converging communications networks.
· . . . and recent optical acquisitions provide growth
opportunities. Lucent has also announced acquisitions of
two optical companies. The first, Ortel, is a provider of
active optical components to community antenna or access
television (CATV) equipment vendors. This deal
strengthens Lucent’s presence in CATV markets, and gives
Lucent greater control over laser production for metro dense
wave division multiplexing (DWDM) systems. The second,
Chromatis, is a provider of optical networking equipment
for metro markets. This acquisition strengthens Lucent’s
optical product portfolio with a best-in-class solution that
we believe should appeal to Lucent’s regional Bell
operating company (RBOC) customers.
· Major contracts. Last year, Sprint announced that it
expects to spend up to $700 million over the next three
years for Lucent’s wireless equipment. Lucent also recently
partnered with Sun Microsystems in a product and
marketing collaboration to improve enterprise infrastructure.
In addition, Lucent announced a $2 billion contract over
five years with Winstar to build out a global broadband
wireless network.
Key Investment Risks
· Size can be a hindrance in attacking opportunities.
Management is cognizant of the need to move faster to take
advantage of opportunities in telecommunications
equipment markets, such as data transmission. |
