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Technology Stocks : Lucent Technologies (LU) -- Ignore unavailable to you. Want to Upgrade?

To: Techplayer who wrote (10051)	10/15/1999 7:41:00 PM
From: John Malloy	Read Replies (1) \| Respond to of 21876

Here's a thought for those worried about the stock's price. In my book on quantitative analysis of stocks, I modeled the stock price as equity per share multiplied by the price/book ratio. Future values of equity/share are relatively easy to forecast. Start with today's value. Then forecast the growth rate of equity/share. For maximum flexibility, you can even forecast by drawing free-hand forecast curves on a sheet of graph paper. The book has a simple worksheet for translating that free-hand forecast into the corresponding forecast of equity/share at any future time. The most reasonable forecast for the P/B ratio is that it cannot stay at today's high level forever. It must come down as Lucent matures. The P/B ratio will begin at today's value and gradually approach some long-run limit appropriate for a mature firm. What is a reasonable long-run limit?. When a stock has fully matured, it is likely to grow at about the current-dollar GDP growth rate, say, 7 %/yr. A mature stock is likely to pay half its earnings out as dividends. That makes the return on equity twice the growth rate, or 14%. The P/E ratio for a mature firm is on the order of 15. The corresponding P/B ratio is the P/E ratio multiplied by the return on equity, in this case 15 times 0.14, or 2.1. Lucent's P/B ratio is now 14 -- a fat premium above a long-run P/B of about 2. Even if there is no change in expectations about future growth rates (and therefore about future values of equity/share) there is plenty of room for the P/B ratio to drop. And that drop will cause a corresponding drop in Lucent's price. Today's high P/B ratio is held up by investor optimism. A bad quarter or two could cause a serious drop in price. John Malloy