An item earlier this week quoted several analysts who think Lucent (LU) is overvalued based on its fundamentals. Here's a different twist on the same story: Either Lucent is overvalued or Northern Telecom (NT) is undervalued. They're both the closest thing the other one has to a direct competitor, and they're both projecting similar earnings growth rates. Yet Lucent trades at roughly 45 times trailing earnings compared with 25 times for Nortel (accounting for takeover charges).
Why the discrepancy?
Other than the fact that Nortel has a lousy reputation on Wall Street after bagging analysts a few months ago, and other than the fact that Lucent has done a far better job putting a positive spin on negative news, and other than fact that Nortel is simply a name people don't want to hear -- nothing. In fact, "I would say Nortel has better long-term prospects if you look at its product lines," says Truc Do, an analyst at
, who ranks Nortel a strong buy; his firm ranks Lucent a mere buy.
Both companies actually traded at fairly similar multiples when Lucent was spun off by
two years ago. The trouble, and the spread, started early last year when Nortel's international market, which accounts for 40% of revs, started to slide. Lucent had much smaller overseas exposure, and it received an added boost from its wireless business.
Then, any ounce of credibility Nortel had was shot to pieces at an analyst meeting Sept. 29, when an otherwise impressive presentation in terms of products was botched by the CFO's clumsy attempt to downplay that the company's second-half revenue growth wouldn't be what Wall Street expected. (Sure enough, it wasn't.) "It created big confusion," says Do, who used to work at
before it became part of Lucent.
However, Nortel has a new CFO, and several analysts believe the company is actually better positioned than Lucent going forward, especially in broadband technology. (Lots of disagreement over that issue; don't forget, Lucent is acquiring
to forge into data networking.) Do believes Nortel's 10-gigabit-per-second "transport system" for carrying voice and data over the Internet will show rapid growth, while Lucent's mainstay wireless biz will mature. "Broadband has good growth left in it for several years," he says.
Meanwhile, last quarter, Nortel's days outstanding of receivables dropped to 90 days from 100, while Lucent's rose to more than 100 from 90.
Lucent, however, has one thing Nortel doesn't have: the smooth salesmanship of CEO Rich McGinn. Nortel President John Roth is an engineer. "But he's an operating guy with technology-savvy outlook," Do says.
Perhaps, but right now sizzle sells over substance.
Day traders trounced?:
Just a thought, but wouldn't it be interesting if a big part of the market's murkiness in recent days was the result, in part, of day traders' getting caught holding the bag with the likes of
? What if they were heavily leveraged and bought it, expecting to flip it above the offering price of 170, only to watch it sink to 148? Again, just a -- ahem -- thought.
The name game:
, the topic of plenty of Wall Street controversy, disclosing earlier this week that it'll have to restate its earnings. And there's
, the subject of an equal amount of
controversy. What do they have in common? Blue Rhino's CEO goes by the first name "Billy" and AgriBioTech's CEO goes by the name "Johnny."
Moral: Do you really wanna invest in companies run by CEOs who go by kid nicknames?
Herb Greenberg writes daily for TheStreet.com. In keeping with the editorial policy of TSC, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnerships. He welcomes your feedback at firstname.lastname@example.org. Greenberg writes a monthly column for Fortune and provides daily commentary for CNBC.