Stocks Fools Love
February 11, 1998

Lucent Technologies
by Paul Motter (TMF DotCom)

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600 Mountain Avenue
Murray Hill, NJ 07974
http://www.lucent.com
$93 3/8 as of February 9, 1998

My stock to love this Valentine's Day is Lucent Technologies. Originally the wing of AT&T dedicated to creating telecommunications equipment for the telephone industry, Lucent had one major limitation -- its only customer was AT&T. Since the April 1996 IPO, marking Lucent's independence from AT&T, it has been able to expand its customer base to AT&T's major competitors, Nortel, Siemens, and others.

It has expanded its product mix as well. In addition to its telecom switching systems, Lucent is now a leader in the wireless phone market and the world's second largest maker of digital signal processors (DSPs), the chips behind emerging technologies such as 56K modems and ADSL-lite.

On January 20, Lucent announced a blowout quarter, with earnings per share exceeding analysts' expectations by $0.20 due to higher gross margins and lower costs. The consensus estimate for fiscal year 1998 is currently $3.01 per share, but actual earnings in the last quarter alone were $1.72 per share. Currently, 13 brokers recommend the stock as a "strong buy," 14 recommended it as a "moderate buy," and three list it as a "hold."

Most exciting about Lucent is the potential of its new product mix. Lucent is on the verge of offering one of the first International Telecommunication Union (ITU) standard V.pcm compliant 56 kbps modems. After years of wrangling, the ITU has finally created a working standard that all of the competing factions can agree to. 3Com, who created the X2 standard, and Lucent, a supporter of the competing Flex technology, have already announced interoperability testing to begin immediately. The adoption of a universal standard is arguably the juggernaut that will finally break the logjam of lagging consumer acceptance of the new modems.

Even better, Lucent is on the forefront of developing DSL digital modems for the consumer market having recently announced a new product called "WildWire," a "spitterless" digital modem as easy to install as any off-the-shelf analog modem. These digital modems can carry traffic up to 50 times faster than today's standard analog modems. Based on existing DSP technology (from Lucent of course), these digital modems will be more affordable and easier to install than existing DSL solutions. There is competition in this area from other companies including Paradyne, Rockwell, Nortel and others, but in contrast to the 56 Kbps modem standards battle there appears to be much more cooperation among the factions.

Lucent also just completed the acquisition of a major player in the gigabit ethernet market, Prominet Corp., which puts it into the same arena as switch makers 3Com, Cisco Systems, and Cabletron. At a purchase price of $200 million in stock, Lucent said the impact of the purchase on earnings for fiscal 1998 is expected to be "immaterial."

Are there dangers? The networking industry has experienced an unprecedented slowdown in growth this year and a lot of the momentum has been taken out of these stocks. Some of the negatives for the industry include the slowdown in the Asian markets, an area where United States networking companies are known to dominate, and what is known as the "Y2K" problem --you may know it as the "Year 2000" dilemma. Many old computer systems, notably mainframe systems using programs written in the Cobol programming language, do not have the ability to differentiate between the years 1900 and 2000 because the programs only log the last two digits of the year. Many companies that normally would be spending money on new technologies find themselves strapped with this problem. Some analysts have estimated that this will put a drag on new information system technology investments until mid-1999.

As a result of increased competition and the problems mentioned above, many former high fliers have experienced humbling declines in the last twelve months, most in the throes of speculation based on previously higher growth rates. While this casts a pall on the networking industry in general, it also creates the opportunity to seek out the leaders. Lucent has held up and is currently trading near its 52-week high. With growth rates increasing quarter by quarter during the last fiscal year and new technologies on the horizon, Lucent Technologies appears to be a solid company for the long term.

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* A Stock to Love represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.