Dueling Fools
Win or Lucent
May 26, 1999

The Bull Rebuttal
by Yi-Hsin Chang ([email protected])

Chris pointed out that it's difficult to predict the future of the networking and telecommunications industry. I agree wholeheartedly. That's what's so exciting about it. This is a fast-paced business with new technologies emerging all the time. It also means that there are ample opportunities to increase revenues and gain market share, and I believe Lucent is in an enviable position to really capitalize on the enormous growth potential of the Internet and telecommunications.

As for Lucent's "sickly balance sheet," Chris throws out numbers without really putting them in context. Here are some numbers for you: Lucent's price-to-estimated earnings ratio is 48, compared with 76 for rival Cisco. Lucent's total return to shareholders last year: 175.9%, the fifth highest among Fortune 500 companies behind Dell, Best Buy, Apple and EMC.

Here's how Lucent compares with its telecom-equipment-making competitors:

        Gross Margin   Return on Equity   Asset Turnover
Lucent    46.41%             21.75%            1.19
Motorola  28.95%             -7.55%            1.05
Nortel    42.82%             -7.22%            1.09
Yes, Lucent used $1.47 billion in cash in the six months ended March, $32 million of which was for its ongoing restructuring to eliminate a total of 23,000 jobs, a move that will help streamline operations. Accounts receivables are increasing because the trend in the industry is for suppliers to arrange or provide long-term financing of as much as over $1 billion for network operators worldwide as a condition to bidding on and obtaining new projects. This is simply a fact of life for telecom-equipment makers. Again, Lucent is well-positioned to compete in this market.

As for the battle between Lucent and Cisco for the future of network communications, first of all, there's plenty of business to go around. Both companies are likely to be the big winners here. But when it comes to developing new and innovative products, my money's on Bell Labs and its proven track record. Interestingly, Lucent and Cisco spend roughly the same amount on research and development (R&D) in terms of percentage of sales. But keep in mind that Lucent's sales are more than three times that of Cisco.

Combine Lucent's R&D muscle with its leadership and strong reputation in the telecommunications industry and you've got an organization that will almost certainly dominate the communications realm for many years to come.

Next: The Bear Responds