A Lucent Call With Murky Information

It seemed sensible enough at the time.

Steven Levy of Lehman Brothers' equity research department issued a bullish note on the telecommunications sector Thursday, specifically Lucent Technologies (LU Quote), raising his price target on the stock to 95 from 90.

Then, just a few hours later, Lucent issued an earnings warning that shook the analyst, rocked the stock in after-hours trading and caused many to wonder why the company left the analyst out there swinging in the wind.

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"You're not the only one that's brought that up this afternoon," Levy said Thursday evening as he prepared to call Don Peterson, Lucent's CFO, to find out exactly what had gone wrong.

But the analyst said he wasn't as worried about making the price-target change -- he said he made it as part of a broader review of the entire sector -- as he was about changing his rating on the stock to buy from neutral just two months ago.

That report's unfortunate title: "Risks Abate ... A Buy We Now Rate!"

"Having been negative on it for 11 months and then going positive on it two months ago -- and having egg on my face now -- that's what concerns me," Levy said. "I was dead right on this thing right up until November."

On Nov. 8, Levy changed his rating on the stock. He said it was then, after extensive conversations with management, that he became convinced that the company's "deteriorating balance sheet" had turned around. Until then, he was convinced that Lucent's growth had gotten ahead of itself.

"Obviously, we were wrong," he says now. And while he won't say that Lucent's management out-and-out lied to him about the company's financial health, he didn't have too many kind words for them, either.

"This is a Lucent screw-up," he says. "There is an increased credibility gap that I think they would have to admit to themselves."

Lucent's Peterson, while admitting that the company's earnings warning was a disappointment, wasn't offering up any mea culpas. "That's an unfortunate perception," Peterson says. "I think the situation has changed, but I'm not sure that necessarily creates a credibility gap. He and we always have to deal with a changing reality. And the reality in this case is a marketplace that's moving very rapidly."

Levy said he hadn't talked to Lucent directly before issuing his revised price target, which he stressed repeatedly was part of a larger analysis of the overall sector. (The last time he talked to management, he said, was before Christmas.)

To be sure, though, Levy plans to speak to the company Thursday night and he was preparing a new note in light of the earnings news. He said he was also considering changing his rating on the stock.

One issue Levy had been concerned with initially at Lucent was the amount of vendor financing -- the practice of financing leased equipment to customers -- the company has on its books. But when he changed his rating in November, he said he was led to believe that those levels were going to remain flat, and that played into his decision to upgrade the stock.

Peterson says it was unfortunate that vendor-financing levels in Lucent's annual report in mid-December concerned analysts, including Levy.

"They certainly weren't higher than we expected," Peterson said. "Maybe we need to do some better communication in that area because we think it was where we intended it to be."

Peterson says companies certainly have an obligation to be upfront with analysts. Price targets are another matter.

"I think companies have a very clear responsibility to describe the business to analysts," Peterson says. "They don't necessarily have a responsibility to make forecasts. We don't make forecasts."

Unfortunately for Levy, analysts do.