Monday, July 13, 1998
Lucent Technologies Inc.
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Phone: 908-582-8500
Website: http://www.lucent.com
Price (7/10/98): $86 1/8
HOW DID IT DOUBLE?
Lucent Technology is glad to be free. The company that was once shackled to AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> has reveled since its 1996 spin-off.
In a market that has embraced large caps and technology stocks, Lucent would have been a beneficiary even without the benefits of standalone living. Lucent has been surprisingly nimble -- from teaming up with AT&T rival MCI in two-way fiber technology to deals with Baby Bells and wireless upstarts, the company has taken advantage of its single lifestyle to play the field.
And that field has been a diamond, and the play is a 1998 homer. Great deals and upside earning surprises have been kind to Lucent shareholders. For the company that bombarded the airwaves to announce its presence with a "Life on Mars" ad, the recent capital appreciation has clearly been out of this world.
BUSINESS DESCRIPTION
Lucent went public in April of 1996 and was ultimately spun-off by AT&T on October 1, 1996. Shareholders received, exactly 0.324084 shares of Lucent for every share of AT&T they owned. On its own now, Lucent is the leader in telecommunications equipment. The bulk of its revenue is generated from network operating systems, but the company also has a significant role in wireless, switching, and even microelectronics.
FINANCIAL FACTS
Income Statement
12-month sales: $28,154 million
12-month income: $431 million*
12-month EPS: $0.74*
Profit Margin: 1.5%
Market Cap: $114,443 million (on 13.1 billion shares)
(*Includes non-recurring items)
Balance Sheet
Cash: $969 million
Current Assets: $12,709 million
Current Liabilities: $9418 million
Long-term Debt: $1918 million
Ratios
Price-to-earnings: 116.4
Price-to-sales: 4.1
HOW COULD YOU HAVE FOUND THIS DOUBLE?
One would think that a company with $28.2 billion in annual sales would be easy to figure out. So, when analysts were expecting $0.09 a share for the March quarter, it was easy to take that as gospel. Maybe a penny over, maybe a penny under, for a seasonally soft quarter, the upgrade from 1997's $0.05 showing was substantial.
Well, despite a significant R&D spending increase to stay competitive, Lucent still earned a whopping $0.14 a share for the quarter. Recent purchases, including Octel Communications, Livingston, and even Hewlett-Packard's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> wireless broadband division, have helped the company grow sales, profits, and most importantly margins. Major domestic deals and international contracts are almost yawnable for the company that has become the leading solution in the telecommunications industry. PrimeCo signs a $500 million wireless contract? Zzzzz. As of last year AT&T made up just 14% of total sales, and that figure will probably continue falling as Lucent continues to grow and diversify.
Finding Lucent could have been just as simple as owning AT&T back in 1996 and receiving the new shares that have more than tripled since the October distribution. Many shareholders may have immediately sold the newly public company when they received the new shares, but spin-offs have often been strong performers and this case was no exception.
WHERE TO FROM HERE?
"Lucent is trying to compete in a New World environment when they're an Old World company in terms of the rules of the Internet economy."
Those harsh words were spoken by none other than Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> CEO John T. Chambers in a recent New York Times article. The head of the networking technology specialist has good reason to be bitter since apparently he has been turned away after seeking a partnership with Lucent.
When Lucent was asked about acquisition strategy during the most recent quarterly conference call, the company noted that it wants to "increase market share and profits in all of its markets across all product lines, but it won't set out specifically to make acquisitions unless they make business sense."
Would a marriage between Cisco and Lucent make sense?
Cisco is doing just fine on its own, and for Lucent the dilution would be substantial. While Cisco and Lucent have relatively similar market capitalizations, Lucent's trailing revenues are four times higher. The idea had to be more in the lines of a proposed truce, a cease-fire between two foes angling to dominate the future in concert.
Then again, seeing how Lucent has just 1.2 times the market cap of Cisco, but is well ahead in terms of sales and earnings, maybe the market is dissing "Old World" in favor of "New World" -- despite the recent surge in shares of Lucent and the fact that few beyond Chambers would ever consider Lucent to be anything other than leading edge in the communications industry.
So, what will tomorrow bring? The earnings outlook is favorable. The company is expected to earn $1.63 a share this fiscal year ending in September and $1.94 a share in 1999. Despite the decent bottom line growth for a company of this size, is it worth more than 40 times next year's earnings? The P/E multiple is a bit rich, but while it probably means the stock is not destined to be a repeat Daily Double feature, it is certainly possible for the stock to sustain the recent gains.
Any kind of planetary collision between "Old World" and "New World," be it through titanic merger or alliance, could lead to more pricing flexibility -- and in the process higher margins, higher earnings, higher Lucent.
-Rick Aristotle Munarriz
([email protected])