Lucent Lags Behind in Telecommunications Industry
COMTEX B:
Aug. 20 (The Star-Ledger/KRTBN)--Nothing, it seems, is sweeter than being a
player in the telecommunications equipment business these days.
Unless you're an investor in Lucent Technologies.
While the rest of the industry continues to grow at a staggering
pace, Lucent, the world's No. 1 maker of telecommunications equipment, seems to
be staggering.
The $40 billion-a-year company warned analysts in late July that it would not
hit profit targets for the rest of year. It was the second time in six months
that Lucent dropped a bombshell on the investment community. The warning sent
Lucent's already deflated shares down 21 percent in two days.
Now, one month after the July announcement, the company's shares are down 32
percent since this time last year. They hit a 52-week low of $39.62 last Monday.
They closed at $43.19 Friday, down 69 cents in New York Stock Exchange trading.
Meanwhile, Lucent's frequently mentioned and more nimble arch-rivals are riding
high: Canadian nemesis Nortel Networks Corp. is up 283 percent in the past 12
months. Ciena Corp. is up 420 percent, and rival networking giant Cisco is up
104 percent.
"Quite frankly, for the past 12 to 18 months, Lucent has been dead money, a big
loser at a time when the spotlight has been on the tech sector," said David
Dietze, president of Summit-based Point View Financial Services Inc., who
manages $125 million in assets.
Quite a smack in the head for the inventor of the touch-tone phone.
And quite a conundrum for a good many long-term Lucent investors who
are ready to capitulate on the stock out of sheer disgust.
Others, though, view Lucent's current situation as an opportunity to buy one of
the leading players in a hot, hot sector.
But what investors are wondering is how a company of that size and that
prominence can stumble so badly, Dietze said. And, more importantly perhaps, can
it recover?
The market for fiber-optic components was some $5.5 billion in 1999 and has been
growing at a robust clip of more than 40 percent annually, according Standard &
Poor's.
CEO Richard McGinn blames some of his company's fumbles on a big transition: The
old-world voice products the company sells, like telephone circuit switches, are
dying off, and Lucent hasn't moved fast enough or effectively enough into newer,
sexier technologies like optical networking gear, which moves voice and data on
pulses of light.
It's little wonder such dog-ate- my-homework excuses from Lucent have done
little to appease analysts and fund managers who have grown impatient with the
stock.
For months, Lucent has acknowledged that it failed to anticipate customers'
changing buying patterns in the rapidly evolving optical networking field and
had lacked the manufacturing capacity to keep up with the red-hot demand for
optical equipment.
What some feel Lucent really needs is a radical change -- perhaps even a new
chief executive to steer the company into the 21st century free of its
cement-shoe legacy as an AT&T spinoff, say some fund managers.
"Everyone admits that the sector they operate in is growing by leaps and bounds
and everyone admits they're in the right business, but a number of players on
the street think McGinn is not the right stuff," Dietze said.
"Personally, I don't think he's there much longer," said Sandy Lynne, a hedge
fund manager and market commentator for JagFN.com, an online financial
information service, and WallStreetInAdvance.com. "You have a demoralized work
force and you need someone to inspire and he's not charismatic.
"He's promised Wall Street too many times and failed to deliver," Lynne said.
"You can't do that. Your credibility gets shot and once it's shot, institutional
money flows out and doesn't come back. What you're left with are proverbial
widows and orphans holding the stock."
Lucent dismisses such speculation regarding McGinn's tenure.
"No one should ever underestimate Rich McGinn's ability to
re-energize the business," said Kathy Fitzgerald, senior vice president of
public relations at Lucent. "After all, it was under his leadership that Lucent
became one of the greatest communications companies in the world.
"He's taking decisive action to refocus Lucent, he's added strong members to his
team and essentially, he has the support of his board."
Indeed, it's not all bad news at the Murray Hill-based company. Lucent has taken
some steps in the right direction, other investors said.
McGinn is undertaking a major restructuring of the company in an effort to keep
revenue rising at 20 percent or more a year.
The company has unveiled plans to spin off its lucrative chip making and fiber
optics unit -- a strategy many analysts have advocated as way to fuel growth at
the business, which has $4 billion in annual sales.
Lucent also plans to spin off by September its slow-growing unit that makes
telecom equipment for corporate offices.
And the company is bringing in fresh talent and promoting its rising stars.
Earlier this month, when Lucent split its optical networking business into two
parts, for example, it named two newcomers to run them -- 39-year-old Jeong Kim
and 43-year-old Bob Barren, each of whom headed companies Lucent acquired within
the past two years.
In April, Lucent also brought in a new chief financial officer, Deborah Hopkins,
who as CFO of Boeing Corp. was largely credited with turning around the finances
at the once-moribund airplane manufacturer.
"My credibility is the most precious asset I own," she told The Star- Ledger in
July after the company's second profit warning. "It's not going to happen a
third time."
All this is good news, analysts say.
For many, though, Lucent still has a long ways to go before getting
back into Wall Street's good graces.
PIMCO portfolio manager Dennis McKechnie shed his holdings in Lucent about 9
months ago.
McKechnie, who manages PIMCO Innovation fund, the second- best-performing
technology fund in the country over the past five years, is bullish on Lucent
rivals Nortel and Ciena, a provider of fiber optical networking equipment.
Because this is a relatively new technology, however, there are only a few
suppliers of optical cable, equipment and components, so Lucent has an
opportunity to dust itself off and get back in the race, McKechnie said.
"The fiber-optic industry is still in its infancy, so it's not too late for
Lucent to get its act together," McKechnie said. "It's a very important
opportunity, if they could just get it right. The question is, will they just
come close to catching up or will they be able to leapfrog over the others?"
The company may, in fact, get its act together in the next several years.
Jordan Kimmel, a market strategist for Randolph-based First Montauk Securities
Corp., believes Lucent, trading in the low-$40s, is a good buy for a investor
with a horizon of at least three to five years.
Lucent shareholders who got in at the start four years ago when the company was
spun off from AT&T aren't doing too badly. On a split-adjusted basis, Lucent
began trading on April 1996 at around $8, Kimmel said.
"This is the first real pullback the stock has had since 1996, and I feel
anybody who accumulates here will have a winner on their hands," he said. "I
think a lot of investors are getting ready to sell the stock out of disgust and
give up on it, and I think it's the wrong time for investors with a long-term
horizon to do that."
But McKechnie says he's waiting for evidence of a rebound to appear before
committing any more money to the stock.
"We don't hold a bias or a grudge and we'd buy the stock tomorrow if we caught
wind that things were turning around," he said. "By the same token, we're not
interested in buying it and parking money and hoping things will improve once we
buy it."
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