Lucent Makes Communications Pay

An 88% run-up ire price has everyone talking

Maybe it was a case of a little-known corporate division finally getting the attention it deserved after a spin-off. Perhaps it was the case of a dominant player being at the right place at the right time in a booming industry. It could even be a combination of those two factors that pushed Lucent Technologies (NYSE: LU) shares up 88% from a year ago. Whatever the reason, we wanted to know if investors could expect more of the same, or if things had finally caught up to Ma Bell’s former telecommunications equipment unit.

Hands-down, Lucent has provided the best news investors got from AT&T’s breakup last year. We’ll credit W. Walter Booth (800-424-3209), vice president of investments with Smith Barney in Washington, D.C., for having chosen Lucent in BE’s Stockpile column last January. At the time, Booth said growth in wireless communications and the invasion of she Internet into everyday lives could push Lucent shares to $52 from $47.25, the stock’s price at the time of his recommendation. Lucent did better than that, rising to $89, an 88% gain, which would have transformed $1,000 to $1,880 in the span of 12 months. But can Lucent keep it up, Booth says prospects for telecom equipment makers remain bright. At this point, however, he’d recommend holding off on buying more Lucent stock, since the market has pushed the company’s share price quite high–to a price-to-earnings ratio of 21 times projected 1999 earnings, almost equal to the company’s projected annual earnings growth rate of 22%. In his eyes, competitors like Motorola (NYSE: MOT) and Ericsson (Nasdaq: ERICY), which trade at 18 times and 15 times 1999 earnings projections, respectively, are better values, particularly considering their earnings growth rates of 27% and 31%, respectively.

But that’s not to say you should bail out of Lucent, Booth says. “We believe there could still be strong price appreciation for the stock,” he says, pointing to a price target of $96 a share in the next 12-18 months.

Lucent Technologies
(NYSE: LU)

Recent stock price: $89.00*
Price at recommendation: $47.25
Return since recommendation: 88.0%
52-week high/low: $90.75/$44.75
Earnings per share: $0.08
Estimated 5-year EPS growth: 20.8%
* As of 10/13/97
Source: Zacks Investment Research
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