Dueling Fools
Win or Lucent
May 26, 1999

Lucent Bull Argument
by Yi-Hsin Chang ([email protected])

Telecommunications and networking equipment maker Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> has been called an "Old World" company in a "New World" environment centered on the Internet. But the company has, in fact, transformed itself into a "New World" company right on the cutting-edge of technology and is growing more like a start-up than some lumbering established giant.

Check out these charts. Click here to see how Lucent's stock has performed in the last three years compared with the S&P 500. The relatively flat blue line there is indeed the S&P 500, which has doubled in that time -- that's nothing to sneeze at. But Lucent shares are up more than 500% (and as high as 600%) in three years. Click here to see how Lucent has crushed the performance of its former parent AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>, and click here to see how Lucent has outperformed rivals Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> and Ericsson <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERICY)") else Response.Write("(Nasdaq: ERICY)") end if %>.

With so-called "Old World" roots, Lucent does boast a long history of innovation. As a spin-off from telecommunications giant AT&T, the Murray Hill, N.J.-based company has produced eight Nobel Laureates and has more than 24,000 active patents to its name worldwide. With Bell Labs in its fold, Lucent can actually say, "We invented the telephone" -- the company is basically a direct descendant of Alexander Graham Bell. Today, Lucent's 24,000 researchers and scientists crank out more than three patents per working day.

With $30.15 billion in revenues last year, Lucent is ranked 33 in the latest Fortune 500 list. CEO Rich McGinn says the company is "on track" to increase revenues by 19% to 20% in fiscal 1999 and earnings per share by around 35% (excluding one-time items). That revenue growth may be slower than rival Cisco Systems' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> 35% growth rate, but Cisco is less than a third the size of Lucent, so it's much easier to keep up that kind of pace.

According to Standard & Poor's, no other $30 billion company is growing 20% or more a year. McGinn has said he expects the company will outpace the rest of its industry by 2% to 5%. Lucent's sales are growing twice as fast as before it was spun off of AT&T in 1996.

That 20% target doesn't even include Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>, which Lucent is in the process of acquiring, or other potential companies it might acquire this year. The company's been on a tear of late, snapping up smaller companies with new technologies. Here's a quick look at Lucent's key acquisitions in the last few years:

* Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> -- Provides wide area network (WAN) core switching and access data networking equipment.

* Mosaix <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MOSX)") else Response.Write("(Nasdaq: MOSX)") end if %> -- Makes software that links companies' front- and back-end offices and helps deliver more responsive and efficient customer service.

* Kenan Systems -- Makes software for third-party billing and customer care.

* Yurie Systems -- Leader in asynchronous transfer mode (ATM) access technology and equipment for data, voice, and video networking.

* Prominet Corp. -- Develops high-performance local area network (LAN) switching equipment.

* Livingston Enterprises -- Provides remote-access networking solutions.

* Octel Communications -- Leader in voice-mail systems.

With the purchase of Ascend, Lucent aims to take Cisco head on and become the leader in networking solutions. Ascend is bringing its cutting-edge products to the merger equation, while Lucent, as the U.S. market leader in telecommunications equipment, has strong ties to phone companies and is known for its dependability. Lucent's rock-solid reliability is a huge selling point with telecommunications companies, which measure system performance out to five decimal points.

The battle between Lucent and Cisco will be fought in an area called "intelligent switching" -- the ability to route data quickly and to differentiate between varying types of traffic (i.e. a phone call from a top customer versus junk email). So far, neither company has a "winning" product. With Bell Labs' proven track record augmented by new technology from Lucent's many newly acquired companies, the company is well-positioned to bring competitive new products to market quickly and efficiently.

Lucent is likely to continue its shopping spree as AT&T also has done of late. Some analysts predict that Lucent will eventually acquire an Internet Protocal (IP) company, maybe privately held Juniper Networks or Nexabit Networks. 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> was a rumored acquisition target prior to Lucent's deal to buy Ascend. In any event, Lucent is poised and nimble enough to leap as the right opportunities emerge.

In April and March, Lucent signed a $1 billion contract with AT&T Wireless and a $780 million deal with Sprint PCS, significantly increasing its share of the wireless communications equipment market. Merrill Lynch recently raised its expectations for fiscal 2000 revenues to exceed $42.8 billion. Merrill is projecting earnings per share of $1.20 for fiscal 1999, a 39.5% gain from 1998, and EPS of $1.50 for fiscal 2000. It has a "long-term buy" rating on the stock.

Lucent's hands have been tied to some extent due to the separation agreement with AT&T that keeps Lucent from competing against any of AT&T's businesses for five years. That agreement should expire in 2001. Considering that Lucent has been a star performer despite such restrictions, imagine what a diva it will be once it's completely freed from its shackles.

Next: The Bear Argument