Thread,
Lehman article on LU.
TCG
lehman.com
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Headline: Lucent Tech: Ests Raised, Strong Sales, Improving Gross Margins, PART 1
Author: Tim Luke 1(212)526-4993
Rating: 2
Company: LU
Country: EPS CUS
Industry: TELECM
Ticker : LU Rank(Prev): 2-Outperform Rank(Curr): 2-Outperform
Price : $120 11/16 52wk Range: $120-49 Price Target: $130-135
Today's Date : 03/18/98
Fiscal Year : SEP
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EPS 1997 1998 1999 2000
QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr.
1st: 1.35A 1.72A 1.72A - -E - -E - -E - -E
2nd: 0.10A 0.19E 0.21E - -E - -E - -E - -E
3rd: 0.33A 0.45E 0.49E - -E - -E - -E - -E
4th: 0.57A 0.74E 0.80E - -E - -E - -E - -E
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Year:$ 2.34A $ 3.11E $ 3.22E $ 3.64E $ 3.85E $ - -E $ - -E
Street Est.: $ 3.10E $ 3.11E $ 3.67E $ 3.68E $ - -E $ - -E
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Price (As of 3/16): $118 Revenue (1998): 29.5 Bil.
Return On Equity (98): 27.4 % Proj. 5yr EPS Grth: 20-25 %
Shares Outstanding: 645.2 Mil. Dividend Yield: N/A
Mkt Capitalization: 76.13 Bil. P/E 1998; 1999 : 37 X; 31 X
Current Book Value: $7.15 /sh Convertible: - -Debt-
to-Capital: 33.0 % Disclosure(s): None
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* This morning, we are raising our earnings estimates for Lucent Technologies
for FY98 and FY99 from $3.11 and $3.64 to $3.22 and $3.85. In addition, to
strong current sales trends, we believe Lucent is benefiting from improving
gross margins.
* After completing our new US Telecom Capex survey, we see operator spending
plans broadly in line with our prior expectations, however we believe Lucent
may be benefiting from spending mix that favors software, high bandwidth
transmission and data solutions
* With operators focused on increasing bandwidth & issues such as number
portability & Year 2000, we have increased estimates for contributions from
high margin switching software, applications software, transmission & data
networking systems as % of total sales.
* Having delivered record margins of 48% in recent 1Q98 boosted in part by
software sales, we look for robust trend to continue. We are raising gross
margin estimates from prior level around 44% to approx 44.5% for FY98 and FY99
Vs 43.5% reported for FY97.
* Following strong recent rise in LU's shares, maintain our positive rating
based on strong current sales momentum and considerable remaining gross &
operating margin leverage. Price target raised from $120 to $130-135 or 30x
our new CY99 ests of $4.15-$4.30
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Lehman Brothers Telecom Capital Expenditure Survey Reveals Focus On Software,
Data And Transmission
Having recently completed updating Lehman Brothers Survey of US Wireline And
Wireless Telecommunications Service Providers Capital Expenditure Plans, we
have found operators spending plans appear to be broadly in line with our
prior expectations. While operators capital expenditure plans have often
proved an imprecise barometer of overall equipment demand trends since service
providers have habitually understated their investment needs at the beginning
of the year and because they include property and plant as well as equipment,
our survey points to a steady increase in investments by wireline operators in
1998 although at a more modest rate than that seen in 1996 and 1997. At this
early stage, we look for wireline capital expenditures to rise around 9% to
$49 Billion after surging 19% and 17% respectively in the last two years.
Our conversations with operators appear to have confirmed a trend towards an
increased focus on investments in the key areas of data networking and high
bandwidth transmission. We note that Bell Atlantic for example has stated it
intends to increase its investments in data from $1.1 Billion in 1997 to $1.6
Billion in 1998 out of a total wireline budget of around $6.3 Billion. MCI has
indicated it aims to spend as much as $1.5 Billion on its data and Internet
infrastructure this year. In addition to focusing on investments in frame
relay networks, remote access and internet/intranet services operators appear
to be highlighting new spending on meeting rising bandwidth demands with
increased deployments of ATM backbones, digital cross connects and Dense Wave
Division Multiplexing (DWDM) systems.
Investments in software and services are often expensed by service providers,
and are therefore, not fully reflected in capital expenditure schedules,
however, our discussions with operators appear to highlight strong investments
in solving Year 2000 issues and in delivering number portability solutions.
We believe that service and software are likely to remain important investment
themes in 1998.
Increasing Our Estimates For Contributions From Higher Margin Divisions
Based on these trends and following conversations with Lucent management, we
are raising our overall gross margins assumptions to reflect increasing
contributions from some of Lucent's highest margin divisions. While Lucent
does not break out its segment sales by operating unit, we are anticipating an
strong increase in the contribution from its rapidly expanding portfolio of
data networking products (an area where industry where margins can range from
50% to 65%). We are also raising our projections for the switching software
area from an estimated $1.4 Billion or 5% of FY97 sales to around $2 Billion
or 7% of FY98 sales. We expect applications software sales to increase from
an estimated $1.3 Billion or 4% of FY97 sales to as much $1.8-2.0 Billion or
6-7% in FY98. At the same time, Lucent's transmission product lines which are
being substantially strengthened by the addition of new high margin DWDM
platforms may grow their share of LU's revenues from an estimated level of
around 10% in FY97 or around $2.8 billion or as much as 12% in FY98. We had
previously expected contributions from these areas to remain broadly unchanged
as a percentage of total sales in FY98.
Gains by these divisions may be partially offset by somewhat slower growth in
areas such as central office switching and PBX's. Based on strong current
business trends our revenues for LU in FY98 and FY99 are increasing slightly
from around $29.5 Billion and $33.6 Billion respectively for FY98 and FY99 to
approximately $29.7 Billion and $33.8 Billion while our gross margin
expectations are increasing from around 44% in FY98 and FY98 to approximately
44.5%. This marks an increase from the 43.5% level recorded in FY97.
(CONTINUED IN PART 2)
(CONTINUED FROM PART 1)
Wireless Margins Also Moving Higher
After recording strong increases in spending on PCS buildouts and digital
upgrades over the last two years, US wireless operators are claiming that
growth in their infrastructure investments should moderate considerably in
1998 and 1999. Results from our survey currently point to an increase of
around 3% in 1998 versus a rise of approximately 25% in FY97. We note,
however, that wireless operators have consistently underestimated their
overall capex needs and while early expenditures may have included investments
in real estate for cell sites and offices, a greater share of the capex pie is
now likely to be devoted to actual infrastructure systems as opposed to land
and towers. We would also highlight that the use of vendor financing
techniques by many of the wireless operators for large infrastructure orders
has at times also tended to lead to capital investments being understated
since service providers have been able to treat vendor financing as an
expense. Based on our analysis initial spending plans, we believe actual
investments in infrastructure systems and software in the US could increase by
as much as 10-20% in 1998 with early trends seen by the major vendors
indicating a solid demand picture.
With respect to Lucent's wireless division which supplies a suite of core
infrastructure systems, as opposed to vendors such as Andrew who are focused
on radio antennae towers, it appears the unit is continuing to see strong
sales growth. Lucent has been able to leverages its leadership position in
CDMA both in the US and internationally in regions such as Argentina, China
and India and while improving its position in GSM. We believe increased
volumes and improved manufacturing efficiencies are also currently allowing LU
to record significant improvements in its overall wireless margins.
Operating Expenses Likely To Be Harder To Reduce, Strong Commitment To R&D
While we expect LU to continue to make good progresses in improving its gross
margin levels, we are more cautious with respect to the company's ability to
substantially trim operating expenses as a percentage of revenues. In
particular, a commitment to establishing leadership positions in key areas
such as Optical Networking (eg;DWDM), broadband wireless and data networking
may ensure that R&D levels remain close to the 11.8% level seen in FY97.
While LU has made excellent progress reducing its SG&A line, investments in
its international sales infrastructure and implementing a corporate SAP system
may restrict further reductions.
Expect Strong Business Trends In Current Quarter
We believe LU is enjoying robust business trends in the current 2Q98 and we
consider our newly revised estimates of $5.85 Billion in sales (+13.7% YoY)
and $0.21 in earnings may actually prove conservative. In addition, to
improving gross margins which we estimate at 42.5% versus 42.1% in 2Q97, we
look for strong sales contributions from all of LU's primary business units
including Wireless Networks, Optical Networking, Data Networking Systems,
Switching and Access Systems and even Microelectronics.
Stock Opinion; Strong Momentum Continues Estimates & Target Raised
In reviewing, Lucent's five simultaneous equations of delivering strong
revenue growth in conjunction with improving gross margins, reducing R&D
expenses as well as SG&A expenses as a percentage of sales and trimming the
tax rate, we consider our recently revised revenue and earnings estimates of
$29.7 Billion and $3.22 and $33.8 Billion and $3.85 in FY98 and FY99
respectively may remain conservative.
In addition to strong sales contributions from high growth areas such as
wireless, high capacity transmission, the new Octel division and the expanded
data networking business, we consider that Lucent's international sales which
saw just 6% YoY growth in 1Q98 and which have been somewhat lackluster to date
may see some increasingly robust momentum in 1998. In addition, new areas
such as the next generation digital loop carrier product line (NGDLC) as well
as call center equipment and systems sales may pick up further steam in FY98.
We therefore, consider Lucent maintains further leverage to improve margins
and to reduce expenses so that earnings outpace revenues for some time to
come. In reviewing, Lucent's powerful collection of assets, we consider that
the breath of its portfolio of products and systems, the richness of its
research resources at Bell Labs, the depth of its relationships with the
world's leading operators and the length of the list of its installed base of
enterprise customers should, in our view, ensure that the company remains a
core holding within telecommunications equipment. Our new 12 month price
target range of $130-135 is based on the shares achieving a multiple of
approximately 30x our new calendar 1999 estimates of $4.15-4.30.
BUSINESS DESCRIPTION: Lucent Technologies is a global leader in telecom
equipment which was separated from AT&T in 1996. It's list of growing
customers include the RBOCs, GTE, long distance, cellular, and PCS providers.
BUSINESS DESCRIPTION: Lucent Technologies is a global leader in telecom
equipment which was separated from AT&T in 1996. It's list of growing
customers include the RBOCs, GTE, long distance, cellular, and PCS providers.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities. |
