***OT from thestreet.com ...LU***
Herb on TheStreet: Why Two Analysts Have Made Negative Calls on Lucent
By Herb Greenberg
Senior Columnist
>From the "fundamentals eventually do count" department: Often when a company
blows up you can look back and see one or two analysts who had
veered from the pack by downgrading the stock but who, at the time, were
considered irrelevant.
Which brings us to Steve Levy of Lehman Brothers and Eric Buck of
Donaldson Lufkin & Jenrette, who are staking their reputations on going
against the grain on Lucent (LU:NYSE) with longtime recommendations that
their clients avoid the stock. So what if it has gone straight up in
their faces? Spend a few minutes with each, and read their reports, and
you can see they're very serious when they say Lucent's fundamentals
never warranted its stock's lofty heights (even though earnings were
advancing at a healthy clip) and that one day investors will wish they
had heeded their warnings.
They're so convinced they're right that late last week both turned up
the intensity of their concerns in notes to clients. "A valuation call
on Lucent has fallen on deaf ears during the company's short-lived
history as an independent company," wrote Buck, who has been negative on
the stock from the day it was spun off from AT&T (T:NYSE) in early 1996.
Added Levy, who turned against the company last August, "If the December
quarter's issues are actually a sign of cracks in Lucent's armor, then
picking the bottom could become an even more creative exercise than
setting the price target for the upside." His current fair value on the
company is 75 to 85; it currently trades at around 100.
How can these analysts be so negative on a stock that is such a
widespread Wall Street favorite? Can they really be right, and can some
30 other analysts be wrong? Or, as a Lucent spokewoman suggests, are
they simply unfamiliar with Lucent's business? Familiarity is the least
of their problems: Both are veterans of tracking telecommunications,
having covered and/or worked in the industry for more than a dozen
years. Familiarity is the reason they're so negative. ("When they say
they have leadership in the networking field, that couldn't be further
from the truth," Buck says.) And can some 30 other analysts be wrong?
Happens all the time. ("I don't do this lightly," says Levy, who says
he's "puzzled" about why so few analysts are concerned about what he
perceives to be the company's creaky fundamentals.)
One reason for the lack of interest in their opinions is Lucent's
performance: Last year profits rose a robust 79%, capping off two
impressive years of growth. But Buck says much of the bottom-line growth
was the result of cutting bloated operating expenses inherited from
AT&T. "The question," he says, "is how far can you go with that? They're
getting near the completion of that process." He says that means
earnings will have to grow more in line with revenue growth, which last
year was 14%. The analysts raise other issues, including rising
receivables and the contribution of non-operating issues, particularly
excess returns on its pension portfolio. And Levy believes Lucent's
pending merger with Ascend (ASND:Nasdaq) will create the mother of
culture clashes. "If Ascend and Cascade had cultural issues, I can't
wait to see Lucent and Ascend," he says.
A spokeswoman, however, says Lucent still believes earnings per share
this year will grow by 30%, and revenue by 20%. "We're very optimistic,"
she says.
So are Levy and Buck. They say they've been hearing from more investors
in the wake of the recent release of sloppy fiscal first quarter
earnings, but most remain nonbelievers in their point-of-view. "I had
the same scenario in Motorola two years ago," Buck says. "I made a
negative call, and it was one of those stocks that when it was
disappointing it went up -- because people thought they were buying a
great technology stock at the bottom. Ultimately, fundamentals caught up
with the stock and people appreciated having that contrarian view out
there. I see the same thing now. People are buying because of the name,
not the fundamentals."
As we like to say in this space, fundamentals don't matter until they
do. By then, of course, it's too late. |
