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Author: BenGrahamMan Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3916  
Subject: Re: Discrepancy Between My Calcs & Fool Article Date: 12/10/2001 7:50 AM
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I have done quite a bit of financial statement analysis on Lucent at this link http://briefcase.yahoo.com/rbco.

Here are some samples of financial statement analysis I have done at my yahoo briefcase.

http://y42.briefcase.yahoo.com/bc/rbco/lst?.dir=/Lucent+Technologies&.done=http%3a//my.yahoo.com/p/d.html%3fv


Here is my analysis of Q1'01

http://us.f1.yahoofs.com/users/e96d9cc/bc/Lucent+Technologies/An+Indepth+Lucent+Report.doc?bc.GLF8Ayn0bg8hu

>>4. Some financial observations:

A. Total Equity increased since 1998 by 18,212 billion
Total Debt increased since 1998 by 3.698 billion

This is actually quite positive.

B. Debt / Equity (looks positive, lowest level in 3 years)

2000*******25 %
1999*******42 %
1998*******35 %

C. Return on Equity (big drop.....warning sign, yet, just a warning sign, remember this company is priced for negativity)

2000*******06%
1999*******43%

D. Accounts Receivable as % of Revenues (very acceptable.)

2000*****28%
1999*****29%
1998*****23%

E. Cash decreased 219 million
Accounts Receivable increased 759 million
Inventory increased 1.437 billion
Revenues increased 3.667 billion

F. Current Ratio (this is okay, we will explore Flow ratio, Cash King and Price to Growth Flow later in this report)

2000*****1.97
1999*****2.10
1998*****1.45

G. Quick Ratio (see Current ratio above)

2000*****1.01
1999*****1.14

H. Accounts Receivable increased YOY 8.6 %
Inventory Increased YOY 33.9 % (warning sign, increase is significant)
Revenues increased YOY 11.0 %

I. Research and Development is decreasing as % of revenues. Now 11.90%. (possible warning sign)

J. Gross Margin % decreasing to 42.2% in F2000, 49.0% in F1999, 46.9% F1998 (possible warning sign)

9. Revenues increased $3.196 B, yet, Gross Profit decreased by $ 738 M. That is a potential concern. Again, this is merely a potential warning sign, which needs to be monitored.

10. When looking at Consolidated Statement of Cash Flows, we see that capital expenditures are 2.7 billion for F2000. Hopefully this capital expenditure build out will be the seed of a future cash cow. F1999 capital expenditures were 2.0 billion. We are definitely witnessing a material build out. This build out equates to $0.81 per share. I witnessed this build out and future cash flow generation with the Cable companies in the mid 1990's. This most certainly is an area to focus on in the future. We need to monitor the projected capital expenditures along with the free cash flow. This year Lucent had free cash flow of $(2.1 billion). This is the main reason that credit worthiness is crucial for Lucent. If they need to borrow for their infrastructure, preferential ratings would be a huge boost. The following is Lucent's press release regarding the sale of its PowerSystems business to Tyco http://www.lucent.com/press/1200/001229.coa.html .


A. Equity Ratio at Market = Common equity at market value / Tangible assets - accrued payables

Using share price of $ 13.50.
shares outstanding of 3325.9

market capitalization = $ 44,899,650,000
Tangible assets = $ 38,847,000
Accrued payables = $10,877,000

Ratio = 44,899,650,000 / (38,847,000,000 - 10,877,000,000)

Equity Ratio at Market = 1.61

Using the same market capitalization, the Equity at Market ratio in F1999 was 1.72. This does not on the face indicate serious deterioration. Again, credit ratings and bond prices of lucent needs to be monitored. The Flow ratio will also be discussed later.

B. Ratio of Earnings to fixed charges is 5.5 in F2000; same ratio was 8.8 in F1999 and 5.8 in F1998. Doesn't seem alarming, yet, we need to monitor.


C. From 10-K for future reference


"11. DEBT OBLIGATIONS

SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
DEBT MATURING WITHIN ONE YEAR
Commercial paper.......................................... $2,475 $ 667
Long-term debt............................................ 765 41
Secured borrowings and other.............................. 243 997
------ ------
Total debt maturing within one year....................... $3,483 $1,705
====== ======
Weighted Average Interest Rates
Commercial paper........................................ 6.3% 5.0%
Long-term debt, secured borrowings and other........7.4% 9.6%

" Lucent had revolving credit facilities at September 30, 2000 aggregating
$4,731 (a portion of which is used to support Lucent's commercial paper
program), $4,000 with domestic lenders and $731 with foreign lenders. The total
credit facilities available at September 30, 2000 with domestic and foreign
lenders were $4,000 and $455, respectively."


This is just an area where I have the greatest concerns. It is being placed here as a reminder to continually monitor operational liquidity.

12. Some valuation ratios and observations

A. Price / Sales ratio is 1.34. This is historically low for Lucent. Granted this is due to Lucent's current woes, but, a price to sales ratio of 1.34 for a company like Lucent is arguably quite low. Lucent traded at 6.74 times sales at one point during 1999 and 7.42 during 2000. Cisco trades (even at $33 per share) at a Price to Revenue multiple of 12.22. Cisco at one point traded at 30.37 times revenues. CIENA Corporation trades at 13X projected F2001 revenues. If Lucent were to trade at a price of 5X revenues, the price per share would be $ 40.40 (this is not a price target, merely an observation).

B. We use a term called Growth Flow Ratio(GFR). The formula is (Price / eps + projected 12 months forward Research and Development). We like to see companies with GFR of less than 12. Lucent's GFR is 10.23 based on current price of $13.50. This is based on projected eps in F2001 of $0.10 per share. If Lucent earnings per share stabilizes and recovers to $0.65 in F2002, then the GFR will in turn go much lower (again , at a current price of $13.50). CIENA Corporation (65) has a GFR of 47. This indicates continued potential overvaluation with CIENA.

Research and Development is incredibly important to a company that operates in high technology. Lucent is in the industry of disruptive technologies. These companies are high tech and have the quick ability to explode or implode in price. These companies have what is called " disruptive technologies". Basically, that means that their technology can disrupt the other companies and potentially leave the other companies obsolete in the dust. The real problem is that the disruptive technology can come from a competitor, leaving your disruptive company holding a bag of obsolete technology. A great example is CIENA (CIEN) they are leaders in optical switching. CIENA has a high tech "electronic switch" for fiber optics. The trouble is that electronics and photonics together are theoretically inefficient, primarily because electronics cause a great amount of heat, are costly and of course have friction attached (unlike optics). Well, the benefit of CIENA is that there is no such thing (yet) as an all-optical switch (o-o-o). This of course could change. That is why research and development costs are such a crucial element. We hope that Lucent will create disruptive technologies with their future all optical switches.

C. Lucent's Interest Coverage Ratio is quite acceptable. This is important as Interest charges and debt loads have become a fear of analysts looking at Lucent. Interest Coverage Ratio measures the ability of a company to continue required operations while still servicing its interest costs.

Interest Coverage Ratio = (pretax income + interest expense)/ interest expense. Generally a conservative number is considered to be 6 or 16.67% inversed. Lucent's interest coverage ratio is 43 or 2 %. This is considered a safe number. Again, this another reason to monitor Lucent debt pricing and grading closely.



F. The Motley Fool Flow ratio is 2.71. This is an improvement from F1999 of 2.99, yet The Motley Fool prefers to have the Flow ratio to be less than 1.25. This link explains the Flow Ratio



The Fool board on Lucent is quite helpful. Lucent remains one of my core investments.

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