Levy's Lucent Call Boosts Stock

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
cfaller 12/4/2012 | 8:02:51 PM
re: Levy's Lucent Call Boosts Stock "But Levy says revenue projections aren't the point, that the message is in the balance sheet figures...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.'"

This guy is a piece of work. Revenue projections don't matter? What about future revenues, do they still matter? Let's assume best case scenario: the debt is reworked, the layoffs don't hurt too bad, and the balance sheet starts to shine.

Now what? Where are LU's revenues going to come from? As someone else pointed out, no one is buying 5E switches anymore, and that's where LU made a huge portion of their profits. Throw on top of that the capex reductions by carriers (which will continue for another 12 months), and it's no wonder LU doesn't want to make any revenue projections, because they know they'll suck!

Maybe Levy is right about making a quick buck on the stock over the next 12-18 months, but let's not pretend that long term things will be good for LU.
johnjohn 12/4/2012 | 8:02:50 PM
re: Levy's Lucent Call Boosts Stock http://www.thestreet.com/_yaho...

i dunno but this guy sure seemed chummy with henry yesterday during the earnings call. think henry knew what was up?
hrdhtr 12/4/2012 | 8:02:49 PM
re: Levy's Lucent Call Boosts Stock cfcaller,
Suck it up, he knows alot more than you do.
You think you have more facts than he does?
I seriously believe all you have is a grudge.

voyeur 12/4/2012 | 8:02:45 PM
re: Levy's Lucent Call Boosts Stock Almost no one is making any revenue projections (i.e. limited or no visibility). And to be honest, for all the big boys, revenue is probably going to be flat or declining for the near and mid term. Of course, no one is going to forecast that because that would kill their stock. It's easier for the small fries to forecast revenue growth when their revenues are not even close to 1/10th of LU, NT, CSCO, ALA, et al.

Anyway, Levy, who has hammered LU in the past, is upgrading them based on balance sheet improvements, which is an indicator of better business management. In the past, LU may have been playing fast and loose with their accounting, but it seems Mr. Levy is at least less concerned with those shenanigans. From an LU bear like Levy, that's a gold star.
gardner 12/4/2012 | 8:02:42 PM
re: Levy's Lucent Call Boosts Stock Suck it up, he knows alot more than you do.

Oh, yeah. Those analysts are soooo smart. They know it all. What were they saying in 1999 and 2000? You gotta better shot if you call the psychic network for a stock tip. At least they don't have a conflict of interest. You wouldn't be someone who has a sizeable position in LU stock that would like to grasp any straw that appears to make your situation less dramatic would you? ;-)

You think you have more facts than he does?

I got a fact for you sunshine: anyone who believes the analysts deserves whatever they get.

I seriously believe all you have is a grudge.

I'd rather have a grudge than the sizeable position in LU stock that you must have to grasp at the Levy straw.
cfaller 12/4/2012 | 8:02:30 PM
re: Levy's Lucent Call Boosts Stock As I said in my original post, maybe you can make a quick buck on the stock over the next 12-18 months. I think it's highly likely that the stock has hit bottom. I hardly consider that to be a "long-term" positive outlook, as Levy was suggesting.

Besides, neither LU nor Levy have addressed future sales. It's a sign of weakness if you just throw up your hands and say, 'oh well, carriers aren't buying, so we can't give you any visibility'. Every industry, market, economy, etc. goes through downturns, and you have to navigate the bad times as well as the good.

The telecom market will grow, but at a smaller percentage. Carriers will be buying, but their purchases will not be for class 5 voice switches or for wireless equipment, and that's the sleeping giant at LU.
hrdhtr 12/4/2012 | 8:02:29 PM
re: Levy's Lucent Call Boosts Stock Analysts are what they are called...
They analyze and suggest, it is up to the individual to make the decision.
BTW The cost basis for all of my Lucent is $0
So put that in your pipe and smoke it ;-)

You don't have to believe analysts, you peruse their suggestions and make your own decisions.

I really don't give a damn if the stock tanks, my fortune is in real estate.

But thanks for the kind words.


fk 12/4/2012 | 8:02:24 PM
re: Levy's Lucent Call Boosts Stock I don't know that I'd be too quick to declare wireless equipment sales dead.
cfaller 12/4/2012 | 8:02:20 PM
re: Levy's Lucent Call Boosts Stock fk, I agree I'm going out on a limb with that, but in my opinion wireless carriers are the next set of carriers to feel the pinch. I don't want to get off on a rant here, but consider:

3G license expenditures have virtually crippled BT, Deutsche Telekom, and various other European carriers. Vodafone doesn't have a lot of debt (relative to their peers), but they have scaled back their 3G/wireless data plans drastically, and they're losing market share.

The situation isn't so bad for US carriers, but I think a lot of them are going to find that 3G isn't that attractive to consumers. No, I don't know this for sure, but I feel safe betting on an extremely slow to nonexistent takeup of 3G level services.

When the wireless carriers wake up, we're going to see a repeat of what happened with the CLECs, IXCs, and DSLs- that is, massive reductions in capex, layoffs, occasional bankruptcies, etc.

Yes, it is conjecture and opinion, but I feel strongly enough about my prediction to put it in writing.
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