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Technology Stocks : Newbridge Networks -- Ignore unavailable to you. Want to Upgrade?

To: pat mudge who wrote (7610)	11/21/1998 12:38:00 AM
From: Gary Korn	Read Replies (3) \| Respond to of 18016

12/1/98 Money 64 (see bold) 1998 WL 8243201 Money Magazine Copyright 1998 Tuesday, December 1, 1998 Issue: December 1998 Vol. 27 No. 12 Investing/Stocks/Showdown Lucent Vs. Cisco The battle for the phone network of the future has begun. Vanessa Richardson Who'll be the leader of the packet? Cisco Systems is the top dog in data networking equipment--the machines that route Internet traffic and connect computers on far-flung corporate networks. Lucent Technologies is the dominant U.S. force in traditional voice switches and networks, a larger but slower growing industry. Now the two markets are converging in a rush toward a new kind of network that will process voice and data over the same lines cheaply and reliably. For now, Cisco has the head start in technology. But the customers both companies ultimately want are on Lucent's Rolodex. At the root of the competition is the inefficiency of basic phone technology--one call now ties up the connection between the parties, even though there are pauses in conversation and the line can handle much more densely packed information. Not only do telephone calls move this way, but because most phone company and corporate networks are old, a lot of data does too. Over the next two years, U.S. phone companies and big business will spend more than $75 billion to divert fax and other data traffic onto more efficient data networks. These networks move information much the way it travels on the Internet--breaking it into small packets and pushing it through a pipe along with packets from lots of other sources before reassembling it at its destination. Down the line the larger goal is to move both voice and data traffic this way. That buildout will cost $150 billion a year in the U.S. over a decade--most of it spent by local and long-distance carriers. World- wide, the figure is four times that amount. Cisco starts out ahead in the race to grab those dollars because it has dominant market share in the most important parts of today's Internet plumbing: routers, which tie computer networks together; and switches, which mete out just the right amount of bandwidth per packet of e-mail, video or web graphic. "Cisco dominates in networking like no one else in hardware. It's attacking from a position of strength," says Trent May, manager of Invesco Growth, which has 2% of assets in both Cisco and Lucent. Cisco can develop products and markets quickly, adding technological prowess through acquisitions. "The most important factor is engineering talent," says Janus Funds analyst Michael Lu. "They're able to maintain personnel, and the company has a very entrepreneurial outlook for its size [$8.4 billion in revenues]." Cisco is one of Janus Funds' top 10 holdings. Cisco has another key edge--a bigger international presence; 47% of its revenues come from overseas, the majority from Europe. Lucent's foreign sales are only one-quarter of revenues. While that may be a blessing in the short term, those numbers need to rise to ensure long-term growth. But Cisco is hardly the sure winner. Lucent has decades-long customer relationships with phone companies from its days as an AT&T unit. Plus, it has a history of building nearly 100% reliable networks--a claim no data networker can make. Internet service providers and corporate information technology departments will put up with Internet downtime, but the phone companies that will buy new voice/data networks want perfection. For Lucent to really get into the data game, however, it will have to make a large acquisition. Only $1 billion of its $30 billion in revenues comes from data networking, and the company has been up front about its need to purchase talent. Until October, Lucent was handicapped in its buying because it couldn't use a tax-advantaged method of merger accounting--a legacy of its 1996 spin-off from At&T. Cisco's top networking rivals, 3Com and Newbridge Network, are often mentioned as merger material. But J.P. Morgan analyst Greg Geiling thinks the best fit would be with Ascend Communications, the top maker of high-speed switches. "Lucent is weak in state-of-the-art equipment, especially where Ascend is the market leader," says Geiling. "Plus, it's the only smaller networking company left standing, and it's willing to listen to offers." How should an investor size up this competition? First, if you're a bargain hunter, look elsewhere. While both stocks have been clipped since the summer on fears of a slowdown in capital spending next year, neither is cheap: Both are trading at P/Es of 39 times estimated 1999 earnings. Cisco's earnings growth rate, which has slowed as the company gained bulk, is expected to be in the low-30% range--matching the growth rate of the data networking market. Analysts see Lucent increasing earnings 17% to 20%. That said, we wouldn't try to argue you out of either of these companies as a core long-term holding. We have recommended both in the past, and as Lu of Janus notes, "There can be more than one winner." Perhaps you can think about a buying decision this way: If you're the type of investor who likes market leaders--maybe you own Merck or Applied Materials--then Cisco is worth a look. On the other hand, if you like good companies that try to extend their franchises--say, Disney or the old mci--then Lucent should be on your radar. -- VANESSA RICHARDSON