From Barons on-line May 9, rather bullish, I'd say!
"Lucent Calling
A rebound is in store
IN THE PAST FOUR YEARS Lucent Technologies (ticker: LU) has restructured its operations and slashed its debt. Now the maker of telecommunications equipment needs to increase earnings if its shares, stuck at 2.58, are to rise.
In 2000, we warned that Lucent's balance sheet was burdened by vendor loans to small, start-up telecom companies that had bought Lucent Technologies' goods (see "Loan Moans," Sept. 4, 2000). In the first quarter of that year, when its shares were trading at 33, the company had loan and guarantee commitments of $9.8 billion, of which $1.75 billion had been drawn. Much as we feared, many small borrowers subsequently folded and couldn't repay their debt, forcing Lucent to write off bad loans.
Lucent's vendor commitments are now down to $108 million, of which $100 million is drawn or reserved. "The big business today is being done by the top 50 [telecommunications] carriers, and they don't need vendor financing," says chief financial officer Frank D'Amelio.
Murray Hill, N.J.-based Lucent also has cut its debt and convertible securities by nearly $2 billion, to $5.87 billion. And its maturity schedule appears manageable, with $379 million of debt due next year. Some $817 million of convertibles can be put back into the company in 2007, and $264 million is due in 2008. Lucent has $4.1 billion of cash and securities.
The company's stronger balance sheet makes Lucent's junk-rated bonds an attractive option. The company's 6.45% debentures due in 2029, rated single-B2 by Moody's Investors Service and single-B by Standard & Poor's, yield about 7.9%.
Lucent's equity also might be an interesting speculation. Wall Street analysts remain negative on the stock, with only three of 32 analysts holding Buy recommendations. Skeptics note that almost all of Lucent's earnings have come from noncash pension credits, and that the company has more than five billion shares outstanding, making it tough to increase per-share earnings substantially. In addition, they worry equipment sales will be hurt by U.S. telecom consolidation, and that Chinese competitors will bring prices down in emerging markets.
Even so, Steven Levy, a Lehman Brothers analyst, recommends the stock. He expects Lucent to see 5% revenue growth, as its exposure to the growing wireless sector more than offsets declines in wireline business. As Lucent continues to cut costs, the combination should result in 25% earnings growth.
Levy also says carrier consolidation will have little impact on capital spending in the next few years. As for the Chinese threat, he notes, 60% of Lucent revenues are generated in the U.S.
Levy has a price target of 6.50 on the stock, which reflects a price-earnings multiple of 25 times his 2006 earnings estimate of 26 cents a share (including eight cents from pension gains). This year, Lucent is expected to earn 20 cents a share (including 11 cents from pension gains), compared with 15 cents in 2004, nearly all of which was pension-related.
Lucent's shares also could get a boost if the company is acquired, as has been long rumored.
"When the time is right -- and I think we have another year and a half at least -- it would make sense for Lucent or Nortel (NT) to merge with one of the European equipment vendors -- Ericsson (ERICY), Alcatel (ALA) or Siemens (SI) -- because of the complementary customer base," says Levy.
Either way, Lucent's shares have bottomed." |
