Today, the Wall St. Journal continues their useful Bulls & Bears Debates this time about fallen angel Lucent (NYSE: LU). The paper notes that Lucent is always among the most activey traded stocks, which is almost entirely due to their low share price (it recently close at $3.05). On a money-weighted basis, it wouldn't be anywhere near the top.
The Bull Case:
- Sprint-Nextel network upgrades could generate $200 Million in revenue for the company.
- Announcements of new contract awards could generate event-driven buying.
- Lucent has strong operating profitability that is being ignored by investors; net income is expected to be $.26/share in FY 2006
And, of course, The Bear Case:
- Still too dependent on fixed-line telecom which is rapidly deteriorating.
- VOIP products not ramping quickly enough to make up for other deficiencies.
- Weak in ethernet-products aimed at the consumer market
- Earnings forecast is difficult, and earnings quality is poor due to pension obligations:
- Mr. Notter, who rates the stock at
"underperform," won't recommend the shares primarily because of
earnings quality. Smart investors, he says, should look at Lucent's
pension position to get a more accurate picture of earnings potential.
Lucent has $178 million in income from pension funds in its current
quarter but that cash isn't available to shareholders. "Speaking in
general terms, we find that most investors overlook pension income when analyzing Lucent's earnings power -- they're only looking at reported net income,"
- Mr. Notter, who rates the stock at
I find Mr. Notter's explanation to be unclear, and the Lucent question will require more due diligence. If Lucent is serious about getting their stock price up, they should do a reverse split so that institutions which are prevented from buying sub-$5 stocks can participate.
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