A surprise upgrade from an influential Wall Street analyst has apparently helped reverse a selloff of shares in Lucent Technologies Inc. (NYSE: LU).

Steve Levy, telecommunications equipment analyst at Lehman Brothers, this morning upgraded Lucent shares to a Strong Buy and set a price target of $18 for the shares over the next 18 months.

By Wednesday mid-afternoon, Lucent shares were trading at $6.79, up 0.36 (5.60%). Lucent shares had tumbled after the company's earnings report yesterday (see Lucent's Hopes Dimming).

Levy's call is notable because he was one of the first analysts to go negative on Lucent, downgrading the stock in 1999, when most analysts had yet to detect any serious sign of trouble in Murray Hill. Lucent was later met with a crush of downgrades by other analysts after it had missed several quarters of earnings.

Levy's research note says Lucent's share price has likely hit bottom and that it should reach $18 within 18 months, even though the income statement isn't likely to improve for two or more quarters. "We find the current stock price a compelling value, especially considering the 58% ownership of Agere," Levy states.

Bananas? Or brilliance? Apparently, investors think the latter is a distinct possibility, judging by market response. Where's the faith coming from?

Levy wrote that he sees indications of an improving balance sheet, and he says these trends, while not improving Lucent's short-term revenue prospects, will give it long-term value. "Lucent's balance sheet is much more important in the next two quarters than its income statement," Levy maintains.

The positives Levy sees include increases in accounts receivable, reductions in vendor financing, and lower inventory levels -- all items that Lucent's executives boasted about in yesterday's conference call with analysts. And the fact that revenues were relatively flat sequentially indicates Lucent's holding its own in a tough market, Levy says.

He also sees improved liquidity for Lucent, indicated by the sale of its fiber business for $2.75 million, the sale of two key manufacturing plants for "at least $550 million," and other factors. And he's pleased with the way the restructuring is going. "A sense of urgency has arrived at Lucent that we have never seen before," he writes.

What's more, Levy thinks that Lucent's postponing the spinoff of Agere Systems (NYSE: AGR) shares for six months or more in order to obtain new credit terms will not substantially affect the value of Lucent's stock.

Bottom line? "This is about as low a valuation as we would expect the company to sell for during its turnaround," Levy writes.

On the downside, Levy says Lucent's still vulnerable to the vagaries of the market in general. Also, it's likely there will be some snags along the way to profitability, including more losses from vendor financing.

Levy isn't alone in seeing progress at Lucent -- although he is unique in seeing a bargain in the stock at this point. Christin Armacost and colleagues at SG Cowen Securities, who issued their own research note today, had similar comments on Lucent's improved balance sheet -- but they weren't willing to pull the trigger on an upgrade:

"While we also find the company's improved balance sheet and operating cash flow results to be positive signs, the lack of visibility and forward guidance remains troubling," reads the SG Cowen note. "Given the absence of clear growth drivers in the near-term, we believe market uncertainty could cause LU to trade in an narrow range in the near-term. Therefore, we maintain our Neutral rating without a price target."

Indeed, the lack of information Lucent provided for use in modeling near-term projections troubled many analysts on yesterday's call. "I don't have the basics," said one analyst who could not be positively identified on the conference call. "These are standard operating procedures, guys. No company's ever failed to provide them in the 18 years I've been doing this!"

But Levy says revenue projections aren't the point, that the message is in the balance sheet figures. This was drummed home by Lucent itself yesterday, when CFO Frank D'Amelio told analysts his outlook for improvement "is not dependent on significant new growth" in revenues, but in the balance-sheet improvements that will come when and if Lucent can get its credit covenants rewritten (see Lucent: Devil in the Details?).

On the subject of the all-important covenant changes, Levy is silent, except to say that he thinks the changes should be made. And he indicates that his projections assume "that the current turnaround efforts do not hit any major potholes, certainly nothing that causes a major derailment."

In the words of Lucent CEO Henry Schacht yesterday: "We'll just have to wait and see."

- Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com