At Lucent, Internet Ties That Blind

The phone-equipment supplier is a laggard on the Internet, but who's counting?
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Lucent

(LU)

is not an Internet stock. It just plays one on the ticker tape.

It appears that institutional investors are busily adding the superstar stock to their portfolios as they finish 1998. Lucent added 3 11/16, or 3.4%, Monday to finish at 111 3/16, putting it up 180% for the year. It was up 1 9/16 today, trading at 112 3/4.

Analyst Alex Cena with

Salomon Smith Barney

urges clients to buy Lucent at these prices and figures shares will jump to 135 next year -- more than 50 times the per-share earnings he expects in 1999. Cena upped his price target from 100 last week "to reflect continued strong fundamentals and market conditions." Salomon Smith Barney has underwritten stock offerings for Lucent.

But these days few stocks climb as far and as fast as Lucent has without a little extra fuel. One propellant is of course the Internet. Bulls argue that Lucent, a telephone-gear supplier, will become a driving force in Internet equipment. Though Lucent is playing catch-up with

Cisco

(CSCO) - Get Report

on the Internet front, its stock has outperformed those of Cisco and numerous other companies with strong cybergrowth potential.

Lucent is valued at about $145 billion, or 155 times earnings for the last 12 months, blowing away Cisco's price-to-earnings multiple of 100. Lower still are

Microsoft

(MSFT) - Get Report

,

Intel

(INTC) - Get Report

and

Dell

(DELL) - Get Report

.

On Wall Street, Lucent has been rising in lockstep with Cisco, which is up 153% for the year. Money managers find them easier to invest in than other Internet stocks.

"You can't put

so much money in

Yahoo!

(YHOO)

because it trades in 100-share lots," says Charles McCurdy, research director with

Veredus Asset Management

. Like Cisco, Lucent is "a super-cap name," he says. Veredus doesn't own either stock.

But unlike Cisco or Yahoo!, Lucent is not anchored to the Internet. Rather, Lucent is a telephone plumber. Cisco might boast only one-fourth the revenue of Lucent, but it owns the underpinnings of tomorrow's multimedia Internet.

In the fiscal year ended in September, Lucent sold only about $1 billion of products that compete in Cisco's Internet realm out of its $30 billion in total revenue, according to rough estimates from analyst Chris Crespi with

BT Alex. Brown

. (Cisco revenue totaled $9.2 billion in the four quarters ended October.) Lucent makes most of its revenue selling gear for conventional phone networks, wireless and wireline. Lucent's networks do carry data messages, but Cisco built the Internet that will act as the foundation for data and even voice signals in the future.

"Right now, Cisco is probably more of an Internet stock than Lucent," says Crespi, who thinks Lucent is overvalued and rates it a hold. Crespi does not cover Cisco. BT Alex. Brown has underwritten a stock offering for Lucent.

Lucent might prove "a self-fulfilling prophecy," Crespi says, if it acquires a large Internet company with its rich stock price. Lucent has bought seven little Internet builders since September 1997.

(In its proxy filed Dec. 22, Lucent's board recommends doubling to 6 billion the shares the company is authorized to issue. About 1.3 billion shares now are issued and outstanding. If investors approve the measure on Feb. 17, Lucent would be able to split the stock 2-for-1 next year, as it did in 1998. It also would free up more stock for deal-making.)

Lucent, a Ma Bell offspring, won't discuss future acquisitions, but a spokesman says his company is shifting into Internet gear. "We have introduced products from Bell Labs at record speed," he says. For example, it designed and built the Packetstar switch, based on Internet protocol, in 12 months.

This evolution takes time. Lucent says customers are still testing the switch, but the company has not said when it expects to ship commercial units.

Almost nobody thinks the Internet will stop growing. But many investment pros do think the flighty tech-stock market will scare once again. And Lucent's extraordinary stock price has a lot more to do with the tech market than with its prospects for mining the riches of the Internet.

McCurdy profited by shorting Lucent this fall when it seemed briefly that Lucent's traditional markets might be slowing. For now, the markets don't seem to be slowing, and McCurdy doesn't like to short stocks just because they are pricey.

Meanwhile, others on Wall Street keep buying the stock, lofty price and all. Said McCurdy: "You've got a lot of guys with a lot of cash, and they've got four days" to cram it into this year's winners like Lucent.