Lucent's pension funds may be providing some smoke and mirrors in the recent report of a profitable quarter. At least that's the sentiment that seems to guide one analyst's downgrade of the company's shares. George Notter of Deutsche Bank AG slapped a Sell rating on Lucent's shares in a note he sent to clients this morning, claiming the company's pension income is making Lucent's income statement look better than it really is. Whoa, Nellie, what's this? An analyst being a real analyst? Looks that way.

The main troubling item in Notter's report is that Lucent generated $685 million in pension income during fiscal 2003, says Notter. Pension income is not cash available to shareholders, Notter explains. Rather, it's an income statement item that shows up anytime the "assumed return on pension fund assets exceeds pension expense." So what? "Without [Lucent's pension income], Lucent is not a profitable company next year -- despite significant operating margin expansion the Street is building into models," Notter writes. In other words, Lucent's most recent profitable quarter -- the first in three years -- was more a product of confused accounting than a sign that the company has righted itself under Pat Russo's guidance (see Lucent's Back in Black). Notter is not the only analyst backing away from Lucent these days. The average analyst rating on Lucent's stock is worse now than it has been in 13 weeks, according to Multex.com. Five analysts have a Sell rating on Lucent, while another 28 either rate it as a Hold or Underperform -- two of the bottom three out of five possible stock rankings. While the company is cutting its retiree benefits quickly, some on Wall Street feel its been carrying the burden of expensive retirement plans for too long. In a recent cross-country tour, former Lucent chairman Henry Schacht complained that Lucent's retiree healthcare benefits cost some $850 million per year (see Lucent Retirees Get the Schacht). Lucent expects about $8 billion to $9 billion in revenue in 2003, and it isn't expected to break even this year. If all that weren't enough, Notter writes that, after a seasonally strong quarter in December, Lucent's prospects look a bit dimmer after the beginning of the year. In his note, Notter puts a $2.00 price target on Lucent's shares. In early afternoon trading on Friday, Lucent was trading down $0.16 (5.65%) to $2.67. — Phil Harvey, Senior Editor, Light Reading