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

To: William Hunt who wrote (2648)	5/19/1998 12:47:00 PM
From: ALTERN8	Read Replies (2) \| Respond to of 21876

Close to Winning $700-$750 MM Contract in Mexico -- Research Notes Subject: Lucent Technologies (LU--$71.56)--NYSE Opinion: BUY ============= Analyst: =============================================================================== Date: May 19, 1998 ------------------------------------------------------------------------------- Market Profile 52-Week Range $79-$29 \| EPS Growth Rate (3-5 Yrs.) 25% Avg. Daily Volume 8,051 M \| ROAE (LTM) 16% Shares Outstanding 1304.0 MM \| Debt to Total Capital 44% Market Capitalization $93,314 MM \| Book Value Per Share $3.58 Floating Market Cap. $83,050 MM \| Indicated Dividend/Yield $0.16/0.22% Institutional Owner. 41% \| Revenue (LTM) $28,154 MM Insider Holdings 11% \| ------------------------------------------------------------------------------- Earnings/Share Fiscal Consensus Fiscal 1Q/Dec 2Q/Mar 3Q/Jun 4Q/Sep Year Est. # P/E Ratio ------ ------ ------ ------ ------ --------- --------- 1997 $0.68 $0.05 $0.17 $0.29 $1.17 61.2x 1998E 1.72A 0.14A 0.23 0.38 1.62 $1.61 44.2x 1999E - - - - 2.00 $1.91 34.9x ------------------------------------------------------------------------------- Highlights: - Lucent's close to getting its second big contract, a $700-$750 mm in Mexico. - Wireless is less than 15% of Lucent's total sales but it remains a winner. - Lucent would beat out Nortel, Nokia and Ericsson for this contract. - The earnings benefit would be $0.04-$0.05 to our 1999 est. of $2.00 - We will wait until it is official from Lucent before revising our 1999 est. - A premium valuation can be supported by Lucent's continued success. - Our 12-month price target remains $90. ---------------------------------------------------------------------------- Refer to Company Update Report dated May 1, 1998 Our Latin America Wireless Equipment Report will be published this week. -- See last week's "Telecommunications Equipment" First Call note May 13. -- Mexico is defined in the North America forecast model and study. LUCENT SHOULD BE THE BIG WINNER AGAIN IN MEXICO: There is news speculation but not official confirmation from Lucent on this contract. Iusacell was the first victory, and now Sistemas Profesionales de Comunicacion (SPC) should be the second big win in Mexico's wireless market. Both wireless operators will compete against Telefones de Mexico. For a $700-$750 million contract, SPC'S aggressive target is to have Lucent build a national, wireless telephone network in one year. The first stage for build out will be made in Mexico City, Monterrey and Guadalajara. The commercial target date is December 1998 if Mexico City, Acapulco and Toluca are ready to go. Lucent would deploy a CDMA network for SPC. Obviously, Qualcomm (QCOM-Hold) did not win the Iusacell or SPC contracts but will get some royalty fees. Qualcomm won a Mexican PCS license for $270 MM with its partner in the bidding Pegaso. So, it will get an equity position and a preferred status to be the vendor for that group. EARNINGS IMPACT, ABSOLUTELY: SPC would make 70%-80% of the investment in the first 12 months of the contract. Lucent's contract equates to a $0.05 per share benefit if we assume a 15% operating margin on the contract, which may be conservative but we believe Lucent had to bid competitively. Nonetheless, we believe Lucent's other qualities were the reasons it won the contract; reliability, total systems integration approach, advanced software platform, and strong services support capability. INVESTMENT THESIS: We believe Lucent shares will appreciate to match its attractive earningsoutlook. We have a bullish two-year earnings forecast. Earnings in 1998-1999 should grow in the mid-20% range, which would exceed the growth rates of most of Lucent's peer group. So far, management has exceeded investor expectations, but the bar continues to be raised in terms of strategic and financial expectations. This quarter again there are many earnings disappointments in the telecommunications equipment sector. And yet, Lucent's track record remains strong but carefully watched by the market with the stock trading at record levels. We remain bullish. ===============================================================================