Fri, Jul 27, 2001 page21

• Lehman calls Lucent a `strong buy'

  PHONE EQUIPMENT A lone analyst believes that the US-based manufacturer's recent efforts to improve its balance sheets are going to eventually bear fruit

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  One day after Lucent Technologies Inc said it will cut another 20,000 jobs and take a charge of as much as US$9 billion, Lehman Brothers Inc's Steven Levy became Wall Street's most-bullish analyst on the stock.

  "I'm not afraid to go positive on it when the sentiment is extremely negative," Levy said in an interview. He also moved against the crowd in 1998, dropping his recommendation on Lucent "when everyone was drooling over it," he said.

  Today, he put a "strong buy" rating on the shares, encouraged by the telephone equipment maker's work to improve its balance sheet, including trimming its accounts receivable and inventories in the year's first six months. The stock, which rose US$0.24 on Wednesday to US$6.67, may reach US$18 in the next year and a half -- a 169 percent gain, Levy said.

  Lucent shares have dropped 86 percent in the past 12 months as it struggles with too many workers, too much capacity and aging inventory as phone-equipment sales plunged. Its long-term debt rating was cut to junk status last month and the company now plans to eliminate up to 49,500 positions. Of 38 analysts who cover the stock, three rate it ``sell,'' 20 rate it "hold" and 15 rate it "buy." Levy's is the only "strong buy." In a four-page report, the analyst said he knows his rating, raised from "market perform," may be "early and possibly very early in identifying a bottom for Lucent." Still, the company is getting rid of manufacturing facilities in Ohio and Oklahoma for more than US$550 million and has an agreement to sell its fiber optic cable business for US$2.75 billion. It will also raise US$500 million through the sale of Agere Systems Inc shares and refinance its headquarters for US$300 million.

  Combined, the plans to raise funds mean ``the liquidity concern that has plagued the stock for the past few months should be put to bed,'' he said.

  Levy has a point, some investors said.

  "A lot of the companies that sell telecommunications equipment really need to stabilize the top line," said Barbara Rishel, a portfolio manager and telecommunications equipment analyst at Allied Investment Advisors.

  "It looks like Lucent was able to do that when other companies were unable to."

  In a report in February 1999, Levy questioned Lucent's stock price as the amount of money it used to help customers finance purchases of its products was climbing quickly. The company was also stretching to meet a revenue target that was way too high, he said. He had put a "neutral" rating on the shares six months earlier.

  This time, Levy noted he doesn't expect the stock to jump soon. Steady improvements to the balance sheet may move the stock higher and it could get a "noticeable pop" to the US$9 or US$11 level once investor anxiety about liquidity is reduced, he said.

  "We are not upgrading our investment recommendation anticipating healthy revenues or earnings for at least a couple of quarters," he wrote in the note. He cut his 2001 fiscal year revenue estimate to US$21.6 billion from US$23 billion, and now predicts a loss of US$1.33 a share in the period, compared to a previously forecasted loss of US$1.04 a share.

  Many investors are still waiting for Lucent to show earnings improvement before heeding the call to buy.

  "Are we jumping in? No," said Kathy Cole Dodd, manager of the US$1.6 billion One Group Large Cap Value Fund, which seeks to outperform the S&P Barra Value Index. "A good part of our performance relative to our benchmark has come from not owning Lucent."
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