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Lucent Drops on Downgrades

After rebounding off its lows, Lucent stock has some short-term hurdles on the road to recovery, say analysts

November 26, 2001

4 Min Read
Lucent Drops on Downgrades

After mounting quite a rally in the past month, shares of Lucent Technologies Inc. (NYSE: LU) dropped today after Morgan Stanley Dean Witter & Co. and ABN AMRO downgraded the company’s stock. Shares closed down 0.35 (4.17%) to 8.04. At one point in the day the stock had gone as low as 7.68.

Before the market opened, the company’s stock had gained about 50 percent since October 1. Earlier this month the company announced a slew of new products and a restructuring plan, which gave investors more confidence about the prospects for recovery (see Lucent Unveils Product Lineup).

While Lucent has recently improved its financial situation through cutbacks and the sale of its fiber business, analysts are still concerned about the company’s short-term prospects (see Lucent Cuts Deal on Fiber Unit).

"Although we regard Lucent, the company, as a long-term survivor in the sector because of its diverse product and services portfolio and strong research and development arm, we believe Lucent, the stock, has appreciated ahead of any improvement in company or industry fundamentals,” writes Alkesh Shah, an analyst with Morgan Stanley, in a research note issued to investors this morning.

Shah downgraded the stock to Neutral from Outperform. And Kenneth Leon, an analyst with ABN AMRO, downgraded the stock to Hold from Add.

In this morning's note, Shah writes that Lucent’s recent jump in stock price is not justified by current market conditions. While the S&P 500 is up only 11 percent and the Nasdaq Composite is up 29 percent, Lucent has been up 47 percent since October 1. Shah says he believes the stock is currently priced at its fair market value of about $8 and he sees no reason to raise price targets:

“Although we are encouraged by Lucent’s new product portfolio and restructuring progress, we believe 47% appreciation since October 1st is ahead of any improvement in company or industry fundamentals.”

He cites several concerns clouding Lucent’s near-term future. For one, he says that Lucent, like other equipment providers, has not accounted properly for carriers’ reductions in capital spending.

Second, Shah cautions that the Asia/Pacific carrier market could also present troubles for equipment companies like Lucent in 2002. He says capital spending in the region is expected to be down about 18 percent in 2002.

Third, despite Lucent’s recent product announcements, the company has announced few contracts for its next-generation gear. And in fact, it has cancelled the development of several next-gen product lines like the Chromatis MSX metro DWDM and MSC 25000 multiservice core switch.

He also says Lucent’s lack of IP expertise could be a short-term downside. And finally, he cites a lack of visibility into the financial details of specific product categories as another potential pitfall.

Leon of ABN AMRO also believes that Lucent’s short-term boom has reached its limit. Not only did he downgrade the stock, but he also cut his fiscal year 2002 estimate to a loss of 53 cents a share from a previous forecast for a loss of 39 cents a share. For the fourth quarter he predicts revenue of $4.6 billion, down from $5.15 billion the previous quarter. He cut revenue estimates for 2002, as well, to $18.3 billion from $21.3 billion and reduced 2003 sales forecast to $19.8 billion from $22.5 billion.

In his note, he says that achieving the company’s guidance of 35 percent gross margins in fiscal year 2003 will be challenging. His dismal outlook is based on his belief that spending by telephone companies will be down roughly 35 percent, with the most prevalent impact occurring in the first half of 2002. One key contract to watch is an order for optical equipment for Verizon Communications Inc. (NYSE: VZ), which may not be realized until mid or late 2002.

While both analysts are concerned about Lucent’s short-term prospects, they are encouraged by the long-term possibilities. The key factor for the company’s future is its close ties with incumbent services providers. Shah and Leon both cite Lucent’s relationship with RBOCs and incumbent carriers as its strongest long-term asset.

“Keep in mind, incumbent service providers will be 90 percent to 95 percent of global capex for 2002-03,” writes Leon. “Lucent has strong relationships with the top 50 service providers around the globe.”

— Marguerite Reardon, Senior Editor, Light Reading

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