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Talking Lucent With Lehman's Steve Levy

It keeps on raining, but the longtime Lucent bear breaks from the pack with a buy call.



bulls are an endangered species on Wall Street, but a one-man stampede has just emerged:

Lehman Brothers

telecommunications equipment analyst Steve Levy.

On Wednesday morning, Levy raised his rating on the struggling descendant of



to strong buy from market perform. The stock rose 4% as Lehman became the first Wall Street firm to back Lucent's shares after a yearlong slide. The timing is certainly noteworthy: Levy's shift came just a day after Lucent

released third-quarter results and unveiled a wide-ranging restructuring that triggered a 19% selloff.

Of course, this isn't the first time that Levy has broken from the pack on Lucent. In February 1999, he was an early Cassandra on the troubles awaiting the company. Later that year, he turned prematurely positive on Lucent, raising his rating on the stock

two months before its January 2000 blowup. (Lehman hasn't underwritten for Lucent.)

With Levy seeing the light on Lucent again, he answered a few quick questions from


TSC: You've been burned by Lucent once before. Did that make you extra careful this time around?

Contrarian Levy


I think I was more diligent. On the other hand, it's not as much of a risk when the stock is trading around $6.50 a share as when it's at $55.

TSC: You say in your report that you're "most likely early and quite possibly very early" on upgrading Lucent. Why now?


I almost did it after the March quarter was released. That would have been really, really early.

That was the first time we saw some significant improvements in the accounts receivable. This quarter we saw more significant improvements in accounts receivable, we saw the first material improvement in inventories, and we saw continued reduction in the vendor financing exposure. That's why we're doing it now.

TSC: You've said that Lucent's revenue for the quarter was pretty good, despite being below expectations. Can you explain?


All they promised was they'd be up sequentially. In an environment where you have Tellabs, which has a similar customer base, reporting revenues down more than 30% sequentially -- look at what Nortel reported March vs. June -- and when you look at Lucent being down $100 million on $5.9 billion, compared to those guys, it's amazing.

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Levy has a strong buy on Tellabs, and his firm has a buy on Nortel; Lehman hasn't done underwriting for either.

The Black Hole

TSC: What's the biggest risk?


I think the biggest risk is that we are misjudging the depth of the industry's problems. The comforting part of that is this company is looking to cut pretty darn deep, so that even if you have a prolonged industry slump beyond what we're looking for -- we come out of this somewere around the middle of '02 -- they're in OK shape from a cost perspective.

That's the biggest risk: if it takes longer than a year for this industry to start showing some growth.

TSC: How great is the bankruptcy risk?


I think that it is

de minimus


TSC: Who else in the telecom industry are you optimistic about?


There are some smaller, single-product-line companies that are emerging that fundamentally are doing great even in a bad market. Certainly they're not peers of Lucent. Somebody like ONI or Sonus. But Lucent does in one day the amount of revenues that each one of those guys does in an entire quarter. So it's not an apples-to-apples comparison.

Levy has a strong buy on both stocks; Lehman was an underwriter for Sonus, but not ONI.

Lucent's 2001 slide

A company I'm hopeful to become more optimistic about is Tellabs. And the reason is, they got hit pretty bad, but they are also extremely well committed to profitable operations. And they're cutting their expenses fairly dramatically. We think their product lines are very well positioned, but they're just suffering from this slowdown.


TSC: What's your big-picture vision of how the telecom equipment industry recovers?


We need rationalization at the service provider side first, whether it's through consolidation or literally shutting some of them down. To me, the service providers in the first six months had a momentum-building set of announcements to the point where they have much lower expectations on their capital spending. And they're just figuring out how much excess capacity they might have had, and what they need to spend.

So when you see the capital spending budgets stabilize instead of coming down, that probably means that visibility will start to build for the equipment companies.

TSC: Is that mid-'02 when you expect that stabilization?


I expect the stabilization to happen in the next few months. I don't expect a year-over-year increase in spending until the middle of '02.

TSC: Any final words?


It's good to be talking positively about the stock instead of looking for reasons to be negative.