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Lucent and AT&T Both Upgraded on Spin-offs
By Emily Burg
AT&T (T): Analysts at Morgan Stanley Dean Witter upgraded shares of the beleaguered telecom provider to STRONG BUY from NEUTRAL and established a 12-month price target for the shares of $35, which equates to 9.5 times estimated 2001 EBITDA (earnings before interest, taxes, depreciation and amortization). "This represents a big shift for us, as we have maintained a NETURAL stance on the company for several years, due to our concerns about the long distance business and cable integration," it writes.

This was an unexpected move that sent downtrodden shares of AT&T up 10%.

In its report the firm writes that AT&T shares now offer a compelling valuation, and several significant catalysts exist that may propel the shares higher in 2001.

Among the catalysts for AT&T shares that inspired the analysts' optimism for the stock is the company's controversial plan to break itself into four divisions. Soon investors in AT&T will be able to exchange their shares for shares of AT&T WIRELESS (AWE) . Later this year, AT&T will IPO its broadband unit, distribute the rest of AT&T WIRELESS shares and create and distribute a consumer tracking stock. The broadband unit is a particularly bright spot. "[It] may reach an inflection point this quarter, setting the stage for solid margin improvement and strong revenue growth starting Q4/OO," the analysts write.

At issue, though, is AT&T's heavy debt load of $62 billion. This debt was a driving force behind the company's recent decision to slash its dividend by 83%. Also, its debt rating was cut to A- and it remains on Standard & Poor's CreditWatch. However, the company recently took steps to address the issue, including raising $10 billion from NTT DoCoMo in exchange for a stake in AT&T WIRELESS and completing a $25 billion bank-debt facility. AT&T is expected to report earnings the week of January 29. The shares closed at $23.25 on January 11. Research on AT&T was downloaded 3274 times, and contributed 110 times, during the week of January 1 to 7.

LUCENT TECHNOLOGIES (LU) : CIBC World Markets upgraded shares of the telecom networking company to BUY from HOLD on valuation, writing that it thinks the company has turned the corner. "We now believe the worst is past and see several potential catalysts ahead," wrote the firm, noting that LUCENT could be a safe harbor for investors should 2001 be a shaky year for the telecom-networking sector. However, they caution that restructuring risks for the company remain. The analysts give the shares a $20 price target.

LUCENT shares, which are down 66% for the past six months, trade at a discount to the firm's sum-of-the-parts valuation, which includes $9 to $10 for the stand-alone company, and $10 for its planned Agere spin-off. CIBC believes that there is hidden value in the company, and advocates further spin-offs going forward. It suggests LUCENT's fiber-optic manufacturing operations as the next candidate, which it values at $2 per share.

Regardless of the near-term value in LUCENT shares, CIBC remains concerned about how long it may take for the company to be "firing on all cylinders again." It fears LUCENT's current restructuring efforts have the potential to be problematic, particularly the sales force reorganization and an IT overhaul. Also, a new management team will be coming aboard. "Until permanent management is in place and up to speed, clarity will be lacking," the firm wrote, noting that it plans to reexamine the company's fundamentals more closely at that time. Meanwhile, they stress LUCENT's potential to be a long-term value play for investors going forward. Shares of LUCENT closed at $18.19 on January 11. There were 4152 accesses of research on LUCENT and 134 new reports contributed, during the week of January 1 to 7.

NEXT LEVEL COMMUNICATIONS (NXTV) : W.R. Hambrecht + Co. have downgraded shares of the communications equipment company to NEUTRAL from STRONG BUY on the company's announcement that it expects a significant earnings and revenue shortfall for the fourth quarter. On January 4, the company noted expectations for revenues of $31 million and a loss of $0.22 per share, compared to third quarter results of $49 million in revenues and a loss of $0.12 per share. The company also announced a $9-$10 million charge for revaluation of inventory, related to lower prices going forward on its key products. The firm's revised revenue estimate for 2001 is $185 million, down from $350 million. It also estimates a share loss of $0.68 for the year, a sharp decline from the firm's original loss estimate of $0.13.

The biggest problem is that major carriers aren't implementing the company's integrated broadband access systems at the anticipated pace. While the company has made major progress in expanding its customer base, that's done little to stem slowness from QWEST COMMUNICATIONS (Q), a major customer, and problems with the Korean market. The company likely will delay profitability beyond the fourth quarter 2001.


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