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WALL STREET, CALIFORNIA | Stock Exchange / James Peltz
and Michael Hiltzik

Lucent Data Strong, but Playboy No Longer Sexy

July 27, 1999|JAMES PELTZ and MICHAEL HILTZIK

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Lucent Technologies (LU)

Jim: Not long ago, Mike, my mom asked me to suggest a stock for her. With no hesitation I mentioned Lucent, which I suppose tells you plenty about how I feel about this company.

Mike: But you have to wonder, is there any company in corporate America today with more boring TV commercials than those Lucent spots showing someone laboriously typing out Lucent's ad slogans?

Jim: Lucent, of course, is the successor to the former Bell Labs unit of AT&T Corp., and it's still a leading maker of telecommunications-switching equipment with more than $30 billion in annual revenue.

Mike: AT&T spun it off in 1996.

Jim: Right, and Lucent's stock has been sizzling ever since. Get this: The stock has soared more than sevenfold since the spinoff, while the Standard & Poor's 500 index has only doubled in value. Even so, I still think it's a rock-solid stock, and I'd buy it as a long-term investment.

Mike: I agree with you, but I would put a special emphasis on the phrase "long term." Because while Lucent is well-positioned in a lot of telecom equipment and supply sectors, it's still got work to do in what's likely to be the most important sector, and that's network switching hardware.

Jim: Where Cisco Systems reigns.

Mike: Right, even though Cisco is much smaller than Lucent in sales.

Jim: OK, but first let's explain what this equipment does.

Mike: This is the gear that makes packets of digital data go where they need to go over the Internet and local networks--whether the data are moving within an office network or from one end of the Web to your home or what have you. And this is going to be one huge business, as you can see by the growth of the Net.

Jim: Lucent isn't standing still, though. It recently bought Ascend Communications to make itself a bigger player in that arena.

Mike: But it's got a long way to go, and it's got ferocious competition even beyond Cisco. There's also Nortel Networks, a Canadian company formerly called Northern Telecom that has also bulked up in that sector by acquiring Bay Networks. But all that being said, Lucent is a strong company with good management and a great record in engineering.

Jim: What I like about Lucent is how it's covering all its bases. The company wants to be the networking supplier for everything, whether it be data, voice or video, and I believe it's laying the groundwork to be a major player in all those fields.

Mike: And that's very important. Think about this: It's a good guess that most communications are going to migrate one way or another to the Internet over the next decade or two. That's because most communications are going to consist of data, not voice, and the Internet is the optimal way to carry the data.

Jim: In other words, we could see the demise of the long-distance telephone system as we now know it?

Mike: Right. There's no question that Lucent's voice communications franchise is not going to be worth as much in the future as it is today. But it's clear that Lucent understands this conundrum and is trying to address it.

Jim: And growing nicely in the meantime.

Mike: Another thing I'll note is Lucent's top management. It's led by a guy named Richard McGinn, and he's one of these hard-charging executives who make their companies hum. I'm not sure I'd ever want to have to report to him, but as a stockholder I sleep better knowing that my stock is in his hands.

Jim: Now there's no overlooking that this stock trades for a very handsome price, about 53 times estimated 1999 earnings per share. That means if Lucent trips, its stock is vulnerable to a nasty drop.

Mike: We've seen that. In recent quarters, investors have feared that Lucent's revenue--though growing smartly--wasn't growing as fast as expected, and the stock came under pressure. But the shares rebounded because investors generally believe this is a stock worth paying up for.

Jim: Here's something else: While we're waiting for future communications trends to play out, Lucent's international business is on fire, and that's with several major economies in the world still on their backs. As those economies rebound, it can only add to Lucent's pace.

Mike: Agreed. Simply put, I believe telecommunications is a good place to be as an investor, and Lucent is a good horse to have in that race.

Playboy Enterprises (PLA)

Jim: I guess my mom can stop reading now.

Mike: Yeah, and given that Playboy talks about positioning itself as an adult version of Disney, maybe Michael Eisner should stop reading here too.

Jim: You ever read Playboy's financial statements? They're amusing. For instance, when it describes its magazine, it goes on forever about all the great articles and interviews it carries, and only at the end does it mention, oh yeah, it also has pictures of women. It's almost as though it really believes that old joke about how men mostly read the magazine for the articles.

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