Lucent: Getting Its Bell Rung
fnews.yahoo.com
Aug 17, 1998
THE ONLINE INVESTOR: Lucent: Getting Its Bell Rung
Few would argue that Lucent Technologies (NYSE:LU - news) is a good company, even a great one, not to mention a great-performing stock since its spinoff from AT&T (NYSE:T - news) two years ago. But concerns about the stock's valuation have gained a louder voice in recent months, and Lucent was especially hard hit by the latest market jitters. The question du jour: Is this stock ripe for a nasty fall, or is the recent dip a chance to buy a top-tier company at a discounted price?
Lucent is certainly a top-tier company. It dominates the markets for telecom switching systems, and its wireless phone gear is a hugely successful operation. It is also the second-largest maker of DSP (digital signal processor) chips, behind Texas Instruments (NYSE:TXN - news) . A few months ago, it formed a strategic partnership with another major player in this field, Motorola (NYSE:MOT - news) , to develop next-generation DSPs. But perhaps the grandest opportunity that Lucent is pursuing comes from the melding of voice and data networks.
Lucent and Nortel (NYSE:NT - news) dominate the voice side of networking, while Cisco Systems (Nasdaq:CSCO - news) , 3Com (Nasdaq:COMS - news) , Bay Networks (NYSE:BAY - news) and Ascend Communications (Nasdaq:ASND - news) are among the big players in the data networking business. The integration of voice and data networking is just trickling onto the scene now, but many experts believe it will turn into a torrent in the next few years. Lucent is making a big push this year to establish its position, but Nortel is moving in the same direction and most analysts say Nortel is ahead of Lucent in this regard. Certainly Nortel's recent acquisition of Bay Networks gives it some important advantages. At the same time, Cisco and friends are pressing in from the other side. It will be a mad scramble as these networking giants try to penetrate each other's markets and at the same time protect their own turf from the aggressive invasion. Some industry watchers expect a rather bloody battle.
Lucent has acquired several companies in recent months to bolster its product lineup and technology arsenal in the data networking field. There have even been occasionally rumors of a mega-merger such as Lucent and Ascend or 3Com. So far Lucent has stuck to smaller acquisitions, though.
Lucent's stock price soared from an April '96 IPO price of $13.50 (split-adjusted) to a peak of $108.50 in July. Since then the stock has retreated about 23 points, and while the market in general also corrected rather sharply, Lucent was hit much harder than other top-tier, large-cap tech stocks. Indeed, the stock is dangerously close to breaking below its 50-week moving average, which could raise concern among investors who use technical analysis. For the fundamental crowd, the stock is trading at 51 times this year's earnings estimates (FY98 ending in September) and 43 times FY99 estimates. That's quite a lofty P/E for a company that is expected to grow earnings at a 22% rate over the next five years. Top-tier companies with a history of beating consensus earnings estimates naturally command premium valuations, but some say a P/E using next year's earnings estimates that is twice the growth rate is stretching it a bit. And that's with 23 points shaved off the stock.
Looking at Price to Sales ratios (PSRs), Lucent is trading at a multiple of 3.9 times trailing 12-month sales, compared to Cisco Systems which is around 12 times sales. But Cisco is growing at a faster rate of around 30%, and its profit margins are much fatter. Other big data/voice networking stocks like Northern Telecom and 3Com are trading at PSRs of less than two.
The near-term outlook for the stock may depend largely on whether momentum investors bail out or add to their positions. But longer-term, everyone will be watching the much-anticipated slugfest with Nortel, Cisco and the others over the voice and data networking market. |
