Jason - regarding the "great" Lucent -- did you see this NYT article ?
April 11, 1999
MARKET WATCH
Taking the Shine Off Lucent Earnings
By GRETCHEN MORGENSON
Long ago, in a galaxy far away, investors examined companies' financial
statements with a sharp pencil and a gimlet eye. The quaint exercise
assured them that corporate earnings were solid and that no surprises
were ahead.
Back on Planet Earth, few investors sharpen pencils today. One who does is
Robert Olstein, a 30-year veteran of financial analysis who manages the
Olstein Financial Alert mutual fund. He picks stocks with high-quality
earnings, avoiding or betting against those whose gains result more from
accounting cleverness than from actual sales. Since its inception in 1995, the
fund has returned 24.5 percent annually, on average; it is up 5.3 percent this
year.
Lately, Lucent Technologies, a leader in
communications systems, has caught
Olstein's eye. It closed on Friday at
$63.625, or 54 times 1999 estimates,
and is up almost 16 percent this year.
"Lucent is a great company," Olstein
said, but not the growth company
investors think it is.
The company's latest numbers seem to
support him. In the quarter ended Dec.
31, sales rose just 5.5 percent from the
corresponding period a year earlier. But
Lucent said that lag from the 14 percent sales growth it showed in 1998 was
a result of deferred sales that would appear in second-quarter numbers, due
April 22.
Even if that report astounds, Olstein points to other areas that make him fret
about Lucent's growth. For instance, during the past two years, Lucent has
written off $2.5 billion of research and development that had been in the
pipeline at companies it acquired. Charging such expenses to earnings makes
future income look better than that in earlier quarters when the expenses
were paid. Securities and Exchange Commission Chairman Arthur Levitt has
worried that companies may use such write-offs to manage earnings.
James Lusk, Lucent's controller, said that the company is highly conservative
in its bookkeeping and that accounting rules required it to take these
write-downs.
As for Lucent's $480 million revenue increase in the latest quarter, Olstein
said that about $200 million came from reconsolidating its folded joint venture
with Philips Electronics. In his view, revenue from continuing operations
showed only 3 percent growth in the quarter. Meanwhile, accounts
receivable and inventories were up 43 percent and 46 percent, respectively.
A Lucent share earned $1.06 in the quarter, before the effects of an
accounting change. Olstein computes this as a gain of 20 cents a share over
the same period last year, after adding back research and development
write-downs to that quarter's earnings.
Even then, Olstein reckons that 19 cents of the 20-cent increase came from
three items: another accounting change, a lower tax rate and a smaller
allowance for accounts unlikely to be paid.
Finally, Lucent's income has been helped by the roaring stock market. Shares
held for employees' pensions created a credit of $558 million last year, fully
14.6 percent of pretax income before the write-offs.
"Eliminate all this stuff, and maybe you're not paying 54 times earnings.
You're paying a lot more," Olstein said. "But nobody cares about risk until
they lose money."
Copyright 1999 The New York Times Company |
