Lucent Technologies Inc shares have dropped 84 percent from their 1999 high, and Wednesday Standard & Poor's cut Lucent's debt rating to junk.
Still, a slim majority of Wall Street analysts recommend the stock. What are they seeing? Placing separate values on Lucent's businesses -- such as its wireless equipment operations and its optical networking unit -- suggests the company is worth at least two-thirds more than the current stock price, said Christin Armacost of S.G. Cowen.
"In a breakup, Lucent would have a price higher than today," Armacost said in an interview. She cut her estimated value of the company to US$12 a share from US$22. Since that's well above where the stock trades, she kept her "buy" rating.
Lucent, the largest US maker of phone equipment, lost more than US$4 billion in its last two quarters because of slowing demand for telecommunications gear. The company has pledged to cut jobs to lower expenses, and to sell its fiber-optic cable business, among other assets, to bolster its capital.
After exchanges closed yesterday, Standard & Poor's cut Lucent's credit rating one notch to "BB+" from "BBB-." The firm predicted that it might take longer than investors expect for Lucent to return to profitability.
A lower credit rating increases a company's borrowing costs on future loans. Lucent shares fell US$0.70, or 8.8 percent, to US$7.24.
After talks about selling Lucent to France's Alcatel SA collapsed last month, Lucent Chief Executive Henry Schacht said he doesn't intend to break up the company beyond the sale of its fiber-optic cable business.
Nonetheless, examining the individual pieces is the only reasonable way to assess Lucent's value, Armacost said.
Armacost's "sum-of-the-parts" analysis puts a value of US$10 a share on the company's operations and US$2 a share on its remaining 57 percent stake in Agere Systems Inc. Agere is a maker of semiconductors and other components for networking equipment, shares of which Lucent sold to the public in March.
She separated Lucent into six businesses, applying a multiple to the sales of each to come up with a projected value for the company. For example, she said Lucent's optical systems business should be valued at 3 times the US$4.6 billion in sales expected this year.
Armacost's US$12 estimate is lower than most. One other analyst set his ``target'' for the stock at US$12, according to First Call/Thomson Financial, while the high end of the range is US$30 a share.
The average among eight analysts who have published estimates of the value of Lucent shares in the last month is US$14.75, First Call said.
Lucent may have a "franchise value" that exceeds US$12 a share, Armacost said. Such a value would be based on the worth of the Lucent name and its position as the largest US maker of phone equipment.
The franchise value "would be some multiple of Lucent's US$20 plus billion in annual sales," she said. For a company in good health, the multiple could be as much as four or five times sales, she said.
That would imply the stock price could be higher than US$30.
Lucent now has a market value of US$24.1 billion.
Investors are struggling with how to value Lucent.
The Murray Hill, New Jersey, company probably is worth more than Alcatel was willing to pay, said Brett Gallagher, head of US equities for Julius Baer Investment Management, which oversees more than US$5 billion.
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