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mercurycenter.com
Why Lucent should stay sky-high
Even good companies get overvalued. The murmur on Wall Street is that one solid high-flier, Lucent Technologies Inc. (NYSE, LU), is one such
company.
An extremely high valuation, weakening sales at many of its competitors, a dramatically slowing growth rate and the prospect of a gonzo acquisition all bode poorly for Lucent's stock.
Having said all that, let's start with some reasons
Lucent's stock won't fall soon -- even if it should.
The spun-off equipment arm of AT&T Corp. NYSE, T), Lucent consistently delivers on Wall Street's expectations, which investors love. It was
born two years ago as a leader in supplying phone equipment to big ''carriers,'' including its former parent. Its management team is revered on Wall Street and is confidently projecting continued
success. And it is in its strongest quarter of its year, when big phone companies complete already allocated capital-spending budgets for big-ticket items like central-office switches.
''We view Lucent shares as a core holding for investors desiring exposure to the global telecommunications equipment market,'' James P.
Parmelee, an analyst with Credit Suisse First Boston Corp. in New York, told his clients after Lucent reported fourth fiscal quarter earnings last week. He thinks the stock will rise as high as $95 in a year. Parmelee's views echoed the general investor enthusiasm for Lucent, whose shares have rebounded from a recent low of $57 three weeks ago to Thursday's close of $79.31. The shares declined 38
cents Thursday, less than 1 percent, in lighter-than-usual trading.
At that price, however, Lucent's stock is trading for about 40 times what Wall Street thinks it will earn next year. Since analysts expect the company's earnings per share to rise about 20 percent, which means Lucent's shares are fetching a valuation of two times its growth rate. That's a premium awarded only to the bluest of blue-chip companies.
Microsoft Corp. (Nasdaq, MSFT), for example, trades for 45 times forward earnings and has a projected earnings growth rate of 31 percent, making its premium to its growth rate lower than Lucent's.
That bothers Steven D. Levy, an analyst with Lehman Brothers Inc. in New York, who isn't recommending that his clients purchase shares of Lucent. He estimates that Lucent's fiscal 1999 revenues will
grow by 17 percent while earnings will rise 28 percent. The gap should narrow, though, as Lucent benefits less from reduced administrative costs and lower effective tax rates.
''Longer term, this is a 20 percent grower,'' says Levy, and ''I'm not willing to pay more than one times (the) forward earnings (growth rate) for that.'' Levy notes that numerous major competitors have
reported sharply slowing businesses and have been punished accordingly by Wall Street.
'When you've got Alcatel, Ericsson and Nortel (as well as small companies) stepping on mines all around you, you start to get the impression you're in a minefield,'' he says.
Using Levy's forward growth rate of 28 percent times the consensus fiscal 1999 profit estimate of $2.09, one would get a valuation for Lucent's stock of $59.
What's more, Lucent's earnings growth has slowed dramatically, from 47 percent in its just-completed fiscal 1998. Other companies whose growth looks less like a technology star and more like an above-average widget maker -- PeopleSoft Inc.(Nasdaq, PSFT) comes to mind -- have seen their shares shaved.
Assuming Lucent continues to chug along without a major performance gaffe, what's more likely to bring it down is another souring on tech stocks. For another data point on such a calamity, consider the market's reaction Thursday to the outlook of Ingram Micro Inc. (NYSE, IM), the Santa Ana-based technology products distributor that reported solid results late Wednesday.
In its conference call with analysts, Ingram noted that it increasingly is helping its customers finance purchases (as is Lucent) and also that it is seeing weak pricing in Europe.
Wall Street, still high on tech stocks, knocked down the shares of Ingram by $4.13, or 8 percent, to $45.75.
Some companies truly can buck the tide. Beware the high-flier that stumbles or falls under an ever-higher tide. |
