By Ryan Fuhrmann, CFA
It’s unfortunate that one of the most widely held stocks in the U.S. has proved to be such a frustrating investment. After “skyrocketing” to nearly $3.50 per share back in early October, Lucent‘s (NYSE: LU) stock has fallen about $1.25 per share, to a new 52-week low of $2.20.
A buck and a quarter won’t even buy you a Big Mac these days, but it represents a 35% drop from Lucent’s October high. If you’ve held the stock since the bursting of the dot-com bubble in 2000, you’ve parted ways with roughly 98% of your money. Meanwhile, the stock looks cheap at about 12 times earnings, and it’s about to be acquired by archrival Alcatel(NYSE: ALA) to create one of the largest telecommunications equipment and service providers around. Could this finally signal an end to investors’ despair?
Well … not just yet. Not surprisingly, Lucent warned that sales and earnings would come in below expectations for the third quarter in a row. It blamed slower sales of North American wireless equipment, which is supposed to be THE growth avenue for Lucent as compared to its stodgier wireline business. Certain analysts attributed the weakness to customers such as Verizon(NYSE: VZ) and Sprint(NYSE: S), which account for the bulk of Lucent’s sales; the telecoms may be looking to reduce inventory as they labor to find their own growth avenues.
Investors have waited patiently for things to turn around at Lucent. Though sales growth finally returned to positive levels in 2004 — after four disastrous years that almost threw the company into bankruptcy — consistent profitability has continued to elude the former Bell Labs. Management finally gave up on going it alone; its merger with Alcatel is expected to close by the end of the year. More bullish investors expect the combination to cut costs by eliminating overlapping administrative and corporate functions. They hope the resulting company will be better able to deal with a smaller, more consolidated customer base that’s looking to cut its own costs as growth in traditional wireline markets matures.
You would think that telecom equipment providers such as Lucent, Nortel(NYSE: NT), or Tellabs(Nasdaq: TLAB) would be able to drive profitability by capitalizing on the expanding need for bandwidth via fiber-optic, wireless, and DSL Internet services. But for some reason, that hasn’t been enough to offset the shrinking fixed-line telephone business. Perhaps the space is too much of a commodity business, where customers can drive a hard bargain based on price. Lucent’s customer base is clearly able to throw its weight around, since the ranks of telecoms have dwindled to a select few, including Verizon and former Lucent parent AT&T(NYSE: T).
Whatever the case, shares of Lucent remain in the cellar, and they could be due for an upward swing. Current shareholders can only hope that the newly formed Alcatel/Lucent combination will be more successful than its individual components were. The industry continues to wallow in its sad state, but things have to improve at some point — don’t they?
AT&T was a formerMotley Fool Stock Advisorpick.
Fool contributor Ryan Fuhrmann is long shares of Lucent and Nortel but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.