LU..... Lucent (LU) 10.52 +1.32: There's always a market for turnaround plays, and that's the way Lucent is being seen today. Rightly so, in Briefing.com's opinion. Unlike many other telecom equipment cos, Lucent has already seen expectations ratcheted down to relatively pessimistic levels. Even without an improvement in its market, Lucent can benefit simply by executing a little better, which is what it appears to be doing.
Prior Problems:
Decline in legacy circuit-switching business.
Overly aggressive vendor financing in an attempt to meet revenue guidance.
Optical acquisitions such as Chromatis and Spring Tide that produced few products but lots of employee departures.
Poor management: Rich McGinn left behind a mess.
Huge debt burden; lousy balance sheet.
Current Status:
There is no stopping the decline of circuit-switching, but this segment actually rose sequentially in Q1,
perhaps indicating that the pace of decline is ebbing a bit.
Lucent is still paying the price for past vendor financing, having just reserved for its entire WCII credit, but it is on the way to cleaning up this mess and presumably making fewer misjudgments on new financing decisions.
Not much can be done about past acquisition mistakes, but the company hasn't made any more mistakes recently. Lucent still has considerable optical assets and its optics business grew in Q1. This will be the key to future growth: continued innovation and technological leadership in optical.
Rich McGinn is gone. It was clear from the analysts' response to today's call with CEO Henry Schacht that there is much greater confidence in the new management team.
Improving albeit still weak balance sheet. Lucent's CFO noted that the company has $6 bln in available liquidity. A sale of its optical fiber division, which appears imminent, will further shore up the balance sheet.
Bottom line: Make no mistake, Lucent is still a turnaround story. It will continue to lose money in the near-term, it still has a lot of debt, and it has additional risk on the vendor financing front. But it also has a salvageable optical product line and new management. Perhaps most importantly, its exposure to emerging providers is almost nil already (less than $200 mln in sales to CLECs in Mar qtr), so the downside risk to revenues is less than at other telecom equipment vendors. The market is making what appears to be a sensible bet on the Lucent revival story today. - Greg Jones, Briefing.com |
