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

To: Techplayer who wrote (15405)	7/19/2000 6:15:22 AM
From: Neil H	Respond to of 21876

From Individual Investor Telecom: Can Lucent Beat the Street? Tell us what you think in LU's Board individualinvestor.com By Alexander Yakirevich (7/18/00) The Street has been eagerly anticipating Lucent Technologies' (NYSE: LU - Quotes, News, Boards) release of its third-quarter results on Thursday, July 20. Since the middle of last week, the stock has been trading up from the mid-$50s to Monday's closing price of $65.69, although the stock gave up most of Monday's gains in the first hour of Tuesday's trading. In the last couple of sessions, volume has also been heavier than normal. While Lucent's June quarter results should show healthy growth over the year ago period, the run up was sparked by investor enthusiasm regarding the possible spin-off of the company's Microelectronics and Communications Technologies business (M&CT), which manufactures integrated chips, optical fiber and other components for telecommunications equipment. "We believe that Lucent is seriously considering this microelectronics spin-off, which when combined with the spin-off of the enterprise division has the potential to unlock significant value for shareholders," wrote Gregory Geiling of J.P. Morgan in a recent report. Such a spin off would leave Lucent with a total sum-of-the-parts market valuation of $72 to $84. If Geiling's right, then investors need not worry that this week's earnings release being a case of "buy on the rumor, sell on the news." The First Call consensus looks for earnings of $0.30 per share. Analysts polled by I/B/E/S forecast revenue of $8.86 billion. In the year ago period, the company earned $765 million, or $0.23 per share on $7.4 billion in sales. The results for the fiscal third quarter of 1999 were restated to reflect the spin-off of the enterprise networking division. The recent bullishness is a welcome development to shareholders who endured the abuse the stock suffered back in January, when management warned that revenue in the December fiscal first quarter would be more than $1 billion short of Street forecasts because the company couldn't meet customer demand for its high-end products. Customers wound up shifting their orders to rivals. The stock lost some 30% of its value in a single day. By the end of February, the shares recouped most of that loss, although they soon began trending downward until the past week, when bullish action picked up once again. We believe that Lucent's per share earnings should be in the lower range of the Street estimates. Consolidated revenue, excluding the company's enterprise networking business, which is expected to be spun off by the end of September, should grow 22% year-over-year, to approximately $9 billion. Given the 25% increase in order backlog at the end of the March 31 second quarter and management guidance of greater-than 20% growth in the company's top line for the remainder of fiscal 2000, we believe that Lucent should have no difficulty meeting the quarterly revenue estimate. The company's wireless and optical networking product segments promise to be the fastest-growing areas. It is worth noting that Lucent secured several large orders in the second half of the March quarter, including $400 million wireless equipment contracts in Australia and New Zealand, which should have had a positive impact on the top line in the June quarter. Turning to margins, we believe that Lucent is well positioned to improve its gross margin by about 300 basis points to around 44.5%. This projection would be in line with management forecasts of gradual improvement in gross income line to the mid-to-high 40% range by the end of the September fiscal year. It should be pointed out that one of the reasons margins deteriorated in the second quarter was greater level of capital expenditures on manufacturing capacity expansion for optical systems. At the end of March, Lucent tripled its production capacity. While the process of upgrading existing facilities and adding new ones continued during the June quarter, we believe that the pace of expansion slowed significantly. That should benefit the June quarter gross margin relative to the March quarter. We believe that the potential source of earnings upside exists at the operating expense line. During the second quarter, Lucent managed to reduce its operating costs by 640 basis points, to 28.7% of sales, on a year-over-year basis. We're being perhaps excessively conservative with our earnings projection of $0.29 per share. We're basing it on the assumption that operating costs will decline by 390 basis points, to 28%, in the third quarter over the same period last year. However, should operating overhead decrease by extra 100 basis points, to 27%, earnings should match the consensus forecast of $0.30 per share. Bottom Line: We anticipate that Lucent should be able to deliver third quarter results in line with expectations. If the company manages to deliver a positive earnings surprise, and announces plans to spin-off the microelectronics segments, shares could rise at least 25% to 30% above current levels.