Hey folks,

I got an email today from someone asking if Lucent's story has changed at all during the time since Tom, Zeke, and I wrote "Lessons From Lucent" back in January (http://www.fool.com/specials/2000/sp000113lucent.htm).

I thought you guys might find my reply interesting (mainly the Flow Ratio comparison):

I was one of the writers of "Lessons from Lucent." You asked about events of the "past 24 hours." I can't help you there, but I have some thoughts on the long-term developing trend with Lucent. Basically, I don't think the story has really changed because Lucent's working capital management is still heading straight downhill.

You may be familiar with a tool called the Foolish Flow Ratio, which we use in the Fool's Rule Maker Portfolio to measure working capital efficiency. (If not, we have a great write up of the Flow at this link: http://www.fool.com/portfolios/RuleMaker/RuleMakerStep6.htm#10) Lucent's Flow Ratio has been worsening steadily for each of the last 10 quarters -- yikes! This trend is gravely disturbing. Let me show you how Lucent's Flow Ratio stacks up to that of its leading competitor, Cisco Systems:

         Lucent     Cisco
12/97     1.47       1.44
03/98     1.56       1.31
06/98     1.57       1.17
09/98     1.69       1.13
12/98     1.89       1.12
03/99     2.03       1.03
06/99     2.18       0.87
09/99     2.26       1.03
12/99     2.67       0.99
03/00     2.80       0.87

For context, we in the Rule Maker Portfolio, like to see a Flow Ratio below 1.25 and the lower the better. What all these numbers mean is that Lucent is focused on pumping up its income statement with increased sales and earnings, but meanwhile, cash is flying out the backdoor at a record pace. In contrast, Cisco is raking in the sales, while also keeping tight control of its cash. The proof is in the pudding. Over the past year, Lucent's free cash flow has been negative $1.15 billion, whereas Cisco has generated positive free cash flow of better than $4.5 billion over the same period.

From these numbers alone, I'm highly skeptical of Lucent's immediate chance for a rising share price. There's a lot going on with Lucent's attempt to gain traction in the optical networking space (see our recent story http://www.fool.com/news/2000/lu000531.htm), but I consider these efforts a side show compared to the basic need to get the company's financial house in order.

-Matt