But what about this view:
By Eric Burroughs
NEW YORK, Jan 21 (Reuters) - Lucent Technologies' revenue
forecast for this year may have disappointed stockholders on
Wednesday, but its fourth-quarter results comforted credit
investors who have gradually begun to breathe a little easier.
Both credit derivative traders and analysts agreed that
Lucent
(nyse: LU - news - people), one of the world's largest makers of
telecommunications equipment, had weathered the worst of the
slide in investment after the Internet boom fueled a massive
network supply glut.
The company has a long, long way to go and certainly has
challenges ahead, especially if the wireless industry goes
through a period of consolidation, possibly starting with AT&T
Wireless' courting of buyers, that would reduce the number of
industry customers.
But Lucent has made big strides in restoring profitability
and steadying its balance sheet, in part by severely slashing
costs. It posted its second straight quarter of profits after a
grueling 13-quarter decline.
"Many of our concerns are being addressed," said Bruce
Hyman, a credit analyst at ratings agency Standard & Poor's,
which rates Lucent at B-minus with a negative outlook.
"The fact that gross operating margins are up and the
balance sheet is holding together: those are both clearly
comforting factors," he said.
Hyman cited the two possible concerns going ahead: the
chance that technology may evolve beyond from Lucent's
strengths, and the potential for consolidation among wireless
customers.
"To the extent there may be meaningful consolidation in
their customer base, that would put a huge damper on wireless
capex (capital expenditure). That wouldn't be a Lucent only
factor, its an industry factor, but it's not a trivial
consideration," Hyman said.
He noted that he was looking to see how the AT&T Wireless
process plays out before reconsidering Lucent's negative
outlook.
Analysts at independent credit research shop Egan-Jones
Ratings noted that Lucent should "continue to make progress,"
after having sharply improving gross profit margins. It sees a
future hike in Lucent's rating to B-plus from the current B
level.
Of course the manic rally in credit spreads has benefited
Lucent as well. But traders said Lucent stands out as a company
whose spread may have more room to run lower.
Such high-flying, higher-returning telecom firms have also
seen their spreads keep rallying even as spreads of
investment-grade companies has begun to slow in the past two
weeks. "General sentiment is good on the sector," one trader
said.
The spread on Lucent's standard five-year default swap
improved to around 260 basis points on the earnings news. That
means it would cost $260,000 a year for $10 million of default
protection. That spread stood as high as 650 basis points just
about three months ago, according to GFI Group.
Yet the spreads of telecommunications companies with
slightly higher rates have already shrunk down to much lower
levels.
The S&P rating of Nortel Networks <NT.TO>
(nyse: NT - news - people) stands at
single-B with a stable outlook, but its five-year default swap
spread is at 165 basis points -- almost a full 11 basis points
below Lucent. Nextel Communications <NXTL.0>, with a BB-minus
rating from S&P and positive outlook, has a five-year spread of
roughly 125 basis points. |
