last quarter. SBC's capex represented 81% of their reported depreciation and
amortization expense. This is down from the 84% level seen in the 1Q 2002
and substantially below the 138% of depreciation seen in the year-ago period.
SPRINT
Sprint's FON division modestly trimmed their spending guidance for 2002,
taking down their full-year spending budget from $2.6 billion to $2.5
billion. We would note that this comes on top of a previous $100 million
reduction that was announced back in mid-June. With the most recent
revision, Sprint's capital spending is expected to decline by roughly 50%
year-over-year. For the quarter, Sprint's capital spending came in at $539
million, roughly flat sequentially despite historically being a period of
seasonal strength. In both 2000 and 2001, FON's 2Q spending increased
sequentially by around 30%. Management suggested that some of the spending
in the local division would be more back-end loaded and used for their
Circuit-to-packet deployment. Sprint's capital intensity stood at 14% during
the quarter. This compares to about 13% in the 1Q period. Capital spending
also represented only about one-half of the EBITDA represented in the
quarter. Based on the revised capital spending guidance for 2002, capital
spending would represent 53% of full-year EBITDA.
There were two encouraging points from an equipment standpoint. First,
Sprint noted their continued commitment to their circuit-to-packet projects
that will use Nortel equipment. Nortel will ship and assist in the testing
of this equipment during 2002 with initial commercial activation of the
network currently targeted for 2Q 2003. Second, management noted relative
pricing stability for selected voice and data services. On the dedicated IP
front, the relative stability is resulting in price declines only in the
single digit range. Frame relay is also showing relative stability over the
last three or four months. Management noted that the access pricing
associated with frame has actually increased in some areas over the last
three or four months. On the ATM front, management said that they were
seeing declines in the low teens range. On the optical circuit front,
management did note they were still seeing aggressive pricing.
VERIZON
Verizon's 2Q02 capex came in at $3.14 billion, a 32% sequential improvement
from 1Q02 levels. Spending in the domestic wireline division ramped up 15%
sequentially and capital intensity came in at 16%, compared to 14% in 1Q02.
However, the carrier ratcheted down their 2002 spending guidance to $13-$13.5
billion, down from $14-$15 billion. This compares to our previous SSB
forecast of $13.5 billion. The primary area of impact is wireline telecom
where spending is expected to fall from $8.8 -$9.3 billion to $7.8 -$8
billion. As a point of reference, last year the carrier invested $11.5
billion in their wireline business. Furthermore, we anticipate more cuts
might be on the horizon as the company's wireline spending would need to ramp
up 46% sequentially in 2H02 just to hit their reduced target. To the extent
that network volumes do not pick up, management suggested they might have to
re-think their revised spending targets.
On the wireless front, there was not much of a change in their spending
intentions for this area, a positive for Lucent in our view. The negative
view of this picture for the vendor, however, is that it seems a meaningful
portion of this build has occurred. Management noted that they have coverage
in 300 cities and 145 million POPs.
FIGURE 3: CAPITAL SPENDING GUIDANCE CHANGES
2001 Actual Original 2002 Revised 2002 Revised 2002
Target Target (4/02) Target (7/02)
Wireless Capex $5.0B $4.7-$5.0B $4.4-$4.7B $4.4B-$4.5
Wireline Capex $11.5B $9.5B-$10B $8.8-9.3B $7.8B-$8.0B
Other Capex $0.9B $0.8B-$1.0B $0.8-$1.0B $0.8B-$1.0B
Total $17.4B $15-$16B $14-$15B $13-$13.5B
Source: Company Reports
VALUATION AND RISKS
Lucent Technologies (LU--$1.77; In-line)
Valuation
We have established a 12-18 month price target of $2. This is based on 0.5x
our calendar 2003 revenue estimate, in line with its nearest comp, Nortel,
but a discount to its communication equipment peer set, by our analysis.
Lucent has historically, and continues, to garner a discount valuation
compared with its peer set due to the falloff in sales and the struggle to
stem losses. In valuing Lucent, we have attempted to compare it to its
nearest competitors as well as the telecom sector as a whole. We use four
primary metrics for valuation: price/earnings, price/revenue, enterprise
value/revenue, and a PEG ratio. On a price to revenue basis, Lucent trades
at 0.5 times, at the low end of its valuation peer set, as we see it. On an
EV/R basis, we find Lucent trades at a multiple of 0.4x, once again at the
low end of its peer set. An analysis of the P/E or PEG ratio reveals little
information, as our EPS estimates are below breakeven.
Risks
We think the most significant near-term risks include weak demand from
wireline telecom service providers, the expected rollover of Lucent's
profitable wireless upgrades, share losses to data networking competitors,
and the struggle to right size the business to get back to breakeven. While
the slowdown in service provider spending has been widely documented for a
number of quarters, Lucent's wireline business continues to decline, as
evidenced by its recent financial results. Furthermore, while its wireline
business continues to erode, we have become increasingly worried that high
margin wireless upgrades occurring in the first half of 2002 could roll over
as contracts are completed. These issues continue to pressure results and
hamper Lucent's ability to hit breakeven.
Nortel Networks (NT--$1.07; In-line)
Valuation
We have established a 12-18 month price target of $2. This is based on 0.7x
our calendar 2003 revenue estimate, in line with its nearest comp, Lucent,
but a discount to its communication equipment peer set. Nortel has
historically, and continues, to garner a discount valuation compared with its
peer set due to the falloff in sales and the struggle to stem losses. In
valuing Nortel, we have attempted to compare it to its nearest competitors as
well as the telecom sector as a whole. We use four primary metrics for
valuation: price/earnings, price/revenue, enterprise value/revenue, and a PEG
ratio. On a price to revenue basis, Nortel trades at 0.4 times, at the low
end of its valuation peer set, as we see it. On an EV/R basis, we find
Nortel trades at a multiple of 0.4x, once again at the low end of its peer
set. An analysis of the P/E or PEG ratio reveals little information, as our
EPS estimates are below breakeven.
Risks
We think the most significant near-term risks include weak demand from
wireline telecom service providers, the rollover of Nortel's profitable
wireless upgrades, share losses to data networking competitors, and the
struggle to right size the business to get back to breakeven. While the
slowdown in service provider spending has been widely documented for a number
of quarters, Nortel's wireline business continues to decline, as evidenced by
its recent financial results. Furthermore, while its wireline business
continues to erode, we have become increasingly worried that high margin
wireless upgrades occurring in the first half of 2002 could roll over as
contracts are completed. These issues continue to pressure results and
hamper Nortel's ability to hit breakeven.
Conversely, the factors that could cause our investment thesis on the name to
be incorrect would be a sudden upsurge in activity in telecom services and
equipment markets. Given, however, the slate of current and probably
bankruptcies in the market, we still think this outcome is unlikely. Another
factor that could cause our view on the stock to be incorrect would be a new
bull market environment for tech stocks that drive up sector valuations.
Companies Mentioned:
AT&T ($12.20 ,NR)
FON ( $10.59, NR)
VZ ($29.83 ,NR)
SBC ($24 ,NR)
BLS ( $22.67,NR)
Q ($3 ,NR)
NXTL ( $7.98,NR)
LU ($1.77, In-Line)
NT ($1.07, In-Line)
ANALYST CERTIFICATION
I, Daryl Armstrong, Alex Henderson, hereby certify that the views expressed
in this research report accurately reflect my personal views about the
subject company(ies) and its (their) securities. I also certify that I have
not been, am not, and will not be receiving direct or indirect compensation
in exchange for expressing the specific recommendation(s) in this report.
chnologies, Inc. (LU)
Ratings and Target Price History
Analyst: Alex Henderson (covered since Jul 10 2000)
------------------------------------------
Target Closing
Price Price
Date Rating (USD) (USD)
------------------------------------------
7 Jan 00 *3M *50.00 53.75
10 Jul 00 *3H *65.00 56.31
25 Jul 00 3H *60.00 49.50
2 Oct 00 3H *37.00 31.00
11 Oct 00 3H *30.00 21.25
23 Oct 00 3H *22.00 22.06
27 Nov 00 3H *20.00 16.75
21 Dec 00 3H *18.00 14.19
12 Mar 01 3H *15.00 11.52
24 Apr 01 *2H *13.00 10.25
24 Jul 01 2H *10.00 6.43
11 Sep 01 2H *9.00 5.55
13 Dec 01 2H *8.00 6.52
10 Apr 02 2H *6.00 4.03
22 Apr 02 2H *5.50 4.49
5 Jun 02 2H *4.50 3.13
13 Jun 02 *2S *3.50 2.80
26 Jun 02 2S *2.00 1.58
26 Jun 02 *3S 2.00 1.58
6 Sep 02 Stock rating system changed
6 Sep 02 *2S 2.00 1.77
------------------------------------------
*Indicates change.
Chart current as of 7 September 2002
See "Important Disclosures" at the end of this report for
a description of the firm's current and former rating systems
orks Corp. (NT)
Ratings and Target Price History
Analyst: Alex Henderson (covered since Jul 10 2000)
------------------------------------------
Target Closing
Price Price
Date Rating (USD) (USD)
------------------------------------------
27 Oct 99 2M *60.00 29.00
29 Oct 99 2M *68.00 30.97
26 Jan 00 2M *135.00 49.97
26 Jan 00 *1M *150.00 49.97
10 Jul 00 *1H *110.00 70.25
26 Jul 00 1H *120.00 83.88
20 Nov 00 1H *60.00 35.25
15 Feb 01 1H *50.00 29.75
12 Mar 01 1H *35.00 16.65
19 Apr 01 1H *30.00 17.80
15 Jun 01 *2H *12.00 9.86
19 Jul 01 2H *9.00 7.75
11 Sep 01 2H *8.00 5.00
24 Sep 01 2H *7.00 5.20
18 Apr 02 2H *5.50 4.04
26 Jun 02 2H *2.00 1.47
26 Jun 02 *3H 2.00 1.47
6 Sep 02 Stock rating system changed
6 Sep 02 *2S 2.00 1.07
------------------------------------------
*Indicates change.
Chart current as of 7 September 2002
See "Important Disclosures" at the end of this report for
a description of the firm's current and former rating systems
IMPORTANT DISCLOSURES
An officer or director of Lucent Technologies, Inc. serves as a director on
Citigroup Inc.'s board.
Salomon Smith Barney or its affiliates beneficially owns 1% or more of any
class of common equity securities of Lucent Technologies, Inc. and Nortel
Networks Corp.
Within the past 12 months, Salomon Smith Barney or its affiliates has acted
as manager or co-manager of a public offering of securities of Lucent
Technologies, Inc. and Nortel Networks Corp.
Salomon Smith Barney or its affiliates has received compensation for
investment banking services provided within the past 12 months from Lucent
Technologies, Inc. and Nortel Networks Corp.
Analysts' compensation is determined based upon activities and services
intended to benefit the investor clients of Salomon Smith Barney and its
affiliates ("the Firm"). Like all Firm employees, analysts receive
compensation that is impacted by overall firm profitability, which includes
revenues from, among other business units, the Private Client Division,
Institutional Equities, and Investment Banking.
The Firm and its affiliates, including Citigroup Inc., provide a vast array
of financial services in addition to investment banking, including among
others corporate banking, to a large number of corporations globally. The
reader should assume that SSB or its affiliates receive compensation for
those services from such corporations.
The Firm is a market maker in the publicly traded equity securities of Lucent
Technologies, Inc. and Nortel Networks Corp.
For securities recommended in this report in which the Firm is not a market
maker, the Firm usually provides bids and offers and may act as principal in
connection with such transactions.
Salomon Smith Barney Equity Research Ratings
Distribution
Data current as of 9 September 2002 Outperform In-line Underperform
SSB Global Equity Research Coverage (3002) 36% 38% 26%
% of companies in each rating category that 48% 46% 38%
are investment banking clients
Telecommunications Equipment -- North America 21% 57% 21%
(14)
% of companies in each rating category that 33% 75% 0%
are investment banking clients
Guide To Investment Ratings: Stock ratings are based upon expected
performance over the next 12 to 18 months relative to the analyst's industry
coverage universe. An Outperform (1) rating indicates that we expect the
stock to outperform the analyst's industry coverage universe over the coming
12-18 months. An In-Line (2) rating indicates that we expect the stock to
perform approximately in line with the analyst's coverage universe. An
Underperform (3) rating indicates that we expect the stock to underperform
the analyst's coverage universe. In emerging markets, the same ratings
classifications are used, but the stocks are rated based upon expected
performance relative to the primary market index in the region or country.
Our complementary Risk rating system takes into account predictability of
earnings and dividends, financial leverage, and stock price volatility, among
other factors. L (Low Risk): highly predictable earnings and dividends;
appropriate for conservative investors. M (Medium Risk): moderately
predictable earnings and dividends; appropriate for average equity investors.
H (High Risk): earnings and dividends are less predictable; appropriate for
aggressive investors. S (Speculative): very low predictability of
fundamentals and a high degree of volatility, appropriate only for
investors/traders with diversified portfolios that can withstand material
losses |
