Paul, that is a very succinct look at LU's financials. Excellent job. It is quite common for people to look at LU's PE and conclude that it's AOL or some other mispriced monstrosity. LU is writing off merger costs with Octel (a snappy little $1.8B pickup) and other acquisitions so trailing earnings offer no insight whatsoever. Then there is the biggie which you rightly point out: goodwill. The write off of that alone is a key to understanding what's happening at LU. The bottom line: for the next few years at least, this is a company that must be evaluated on an earnings from operations or EBITDA basis to get any meaningful analysis.
I own both TLAB and LU, and my vote is that this merger rumor was cooked up by the options boys to keep the strike price cozy until expiration. Fundamentally, there is no strategic value to the combination of these two enterprises by which I mean neither provides some vital missing link to the other. I AM NOT TRYING TO START SOMETHING HERE--THIS IS JUST AN EXAMPLE. If somebody were to say that CSCO was on the prowl, my ears would perk up simply because CSCO's future competition is going to come less and less from Bay Networks and 3 Com and more and more from LU and TLAB, IMO. Obviously I have no idea if CSCO could muscle up to the plate nor am I particularly interested in their doing so. I like TLAB just fine as an independent company and it doesn't seem to me that they are growth constrained in any way--internally generated cash flow seems perfectly adequate to fund a healthy R&D budget and grow the company's operations. Which is exactly what you would expect given their profit margins!
As for LU, the goodwill that seems to be distorting their earnings in the eyes of some, is in my opinion real. I wouldn't normally touch a company with significant goodwill on its balance sheet, but in LU's case it represents a vault full of Bell Labs patents, and a lab full of Bell Labs' scientists and engineers. I'm happy to take that bet.
Regards, Mike Doyle |
