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

To: KYA27 who wrote (11665)	12/14/1999 10:27:00 PM
From: Bindusagar Reddy	Respond to of 21876

No KYA, LU may spin-off only Opt0-electronics division. It should have similar market cap as JDSU and fly like one too. Here is what CIBC analyst thinks. 02:44pm EST 14-Dec-99 CIBC World Markets Corp. (Jim Jungjohann) LU SDLI ETEK NT LU: Lucent Optoelectronics Group Update P1-3 Investment Conclusion We reiterate our Buy rating on Lucent Rating: BUY Technologies following a field trip to LU-NYSE(12/14/1999) $80 1/2 Lucent's Optoelectronics unit in 52-week $84 3/16-46 19/32 Breinigsville, PA yesterday 12/13.. Shares Out 3 Billion Presentations and a facility tour from Float 3 Billion Shares senior management were lead by Dan DiLeo, Market Cap $242 Billion President of the Optoelectronics Division. Div/Yield Nil/Nil The unit of approximately 1700 employees Fiscal Year September represents the world's largest producer of Book Value $4.43 per Share communication optoelectronics and FY 2000E ROE 29.9% semiconductors. In addition the unit boasts LT Debt $3.8 Billion the largest patent portfolio in the world Preferred Nil for photonic technology - a large reason for Com Equity $13.6 Billion the lack of acquisitions when your incubator is Bell Labs. Nothing was conveyed in the meetings that would give us any concern related to our Earnings per Share closely followed optical component companies FY 1999 $1.23 such as JDSU, SDLI, or ORTL. FY 2000E $1.60 Several key take-aways from our meeting FY 2001E $1.80 including: 1) Growth has been stronger than our P/E Ratio previous projections. Management indicated FY 1999 65.4X sales growth near 90% in fiscal 1999, or FY 2000E 50.3X well in-line with its peer group of JDS FY 2001E 44.7X Uniphase, SDL, and E-TEK. 2) To our thinking, the Optoelectronics business is largely going unrecognized by Investors. At what we believe is a $1 billion-plus run rate, Opto accounts for a Company Description: little more than 2% of Lucent's total Lucent Technologies is a large forward revenue - albeit the sexiest 2% of and global provider of a wide any company we are aware of. Lucent's Opto range of products and services unit could easily ascribe a value at over which are used in networking and $20 billion. telecommunications applications 3) We clearly believe, although it is not by service providers and likely to happen, this is one business unit corporate enterprises. that could/should be spun-off from the parent to unlock the hidden value and open the unit up for in an industry that should see unsurpassed growth over the next decade. 4) In FY2000, management indicated Lucent's own Optical Network Group (ONG) would still account for roughly 30% of the component unit sales, indicating perhaps the unit's success as a merchant supplier already. 5) Veiled inside Lucent, the unit has a keen sense of understanding macro market trends. The unit has an industry leading optical device expertise with the aid of having a "big picture" systems knowledge. Truly integrated, the unit has a unique capacity for integrating both optics and integrated circuits. 6) Following our plant tour we were overwhelmed with the degree of automation found in the facility - and we have been on a lot of tours! We leave with several key take-aways from our meeting including: Growth has been stronger than our previous projections. Management indicated sales growth near 90% in fiscal 1999, or well in-line with its peer group of JDS Uniphase, SDL, and E-TEK. Based on our own estimates, the unit posted FY99 sales near $650 million, but currently is near an annual rate of over $1 billion. for 2000, which would place the unit at about the same size of JDS Uniphase if we exclude JDSU's test and measurement unit. To our thinking, the optoelectronics businesses are largely going unrecognized by Investors. Specifically it is also one unit where Lucent has a clear leadership position over Nortel, Ciena, and Corning. With comparable publicly traded companies at heightened valuations over the past few months, Lucent's Opto unit could easily ascribe a value at over $20 billion. Peer group revenue comparisons show an average market-capitalization to revenue ratio of over 22 times 2000 projected revenues, see exhibit #1. Exhibit #1 - Peer Group Revenue Comparisons Co. Price Mkt Cap 99 Revs* 00 Revs* MC/99 Revs MC/00 Revs ETEK $93 $6.5 $230 $315 27X 20X JDSU $234 $44.5 $842 $1438 53 31 SDLI $174 $6.8 $182 $270 37 25 ORTL $88 $1.32 $74 $102 18 13 Average 34 X 22 X *Consensus and CIBC estimates Spin-off? Not likely, but we clearly believe this is one business unit that could/should be spun-off from the parent to unlock the hidden value and open the unit up in an industry that should see unsurpassed growth over the next decade. Cash and a publicly traded currency could let this unit prosper in a market that is moving decisively toward integrated components, modules, and hardware systems leaving customers (OEM vendors) focused only on their network software and network management competency. Management eluded to few areas of current customer conflict, but we find it hard to believe the evolution of the component market will not bring future issues for captive component providers like Nortel or Lucent with their own in-house component capabilities. For instance, Nortel is both a very large customer and a serious competitor with Lucent at the optical systems level. In FY2000, management indicated Lucent's own Optical Network Group (ONG) would still account for roughly 30% of the component unit sales, which is actually down from almost 70% just two years ago -- indicating perhaps the unit's success as a merchant supplier already. In our view, leading edge intellectual property (IP) will always be done at the OEM level (Lucent is not getting rid of Bell Labs or Area 11), but we increasingly feel commercial volume production is best left in the hands of merchant suppliers. Understanding Market Trends. Lucent possesses an industry leading optical device expertise with the aid of having a "big picture" systems knowledge. Shared R&D resources with the optical networking and other microelectronic groups bring significant value added, but its close relationship with system level development helps in driving next-generation product leadership. While JDS Uniphase elevated our knowledge base of integrated optics, Lucent's Opto business can take it a step further by adding 1) both the integration of optics and integrated circuits and 2) intelligent and programmable subsystems.