DRIP PORTFOLIO
Is It Time to Hang Up on Lucent?

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By George Runkle (TMF Runkle)
April 3, 2000

Lucent's recent problems have been well documented in Fooldom. In an article by Matt Richey, Bill Mann, and Tom Gardner, Lucent's receivables and inventory growth were dissected. Also, in an even earlier Rule Maker Portfolio report, Phil Weiss expressed anxieties about the company.

So, what do we do? Since I'm an investor in Lucent, I'd like to analyze the company myself. Let me go through my thought process and see if you all agree with me. First, in a Drip investment, we're in for a very long haul. In my case, I'm making investments monthly in Lucent, and have been doing so for several months. Temporary problems that may affect a company for a year or so can be seen as buying opportunities. So, an announcement of revenue shortfalls might not be such a problem for me as a Drip investor.

I started by doing some research at Lucent's website. It was fascinating reading about the company's products. I found that Lucent is the leading provider of networking solutions to ISPs. It provides items like Voice Over NetworX, which allows ISPs to provide Internet telephony. I also see that data is growing at 300%, whereas voice is growing at 5%, and voice is going to be traveling over packet networks (or at least I think it is -- it's not a very good graph). Let's see where the money is coming from. Lucent's Service Provider Networks segment accounted for 62% of revenue in 1999. In products and services, Core Networking Systems accounted for 46% of the mix. Let's move on and see just what that is.

The Service Provider Networks segment is involved in "Broadband Networks, Access & Concentration Enterprise Systems, and Intelligent Network," to quote Lucent directly. I couldn't find what they consider Core Networking Systems. There are some pretty involved descriptions of the company's products in these areas, and it's a bit overwhelming trying to form a complete picture. However, after reading through product descriptions until my eyes watered, I found what seems to be a common thread: Lucent is involved in developing and marketing products that are bringing about the convergence of voice, data, and video. When studying companies like Scientific-Atlanta (NYSE: SFA), the analysis is rather easy since it provides equipment for one type of industry. With Lucent, we can find it providing products for industries as diverse as wireless access, cable, networks, and ISPs, which is a bit daunting.

What I don't like about Lucent's website is they go over their businesses, services, and products, but they never tie it together. For example, they present that Core Networking Systems is 46% of their product mix, but I can't find anything telling me what "Core Networking Systems" are. I can read at length about switches, optical networking devices, or whatever, but they don't say where these items are in the business. How do these things all add up in the telecommunications market? The company never gets there, it just provides a seemingly endless list of products with the technical descriptions. It's really interesting to me as an engineer, but it doesn't help me as an investor.

Let's look at the basic financials. In my admittedly limited statistical study of telecommunications, networking, and cable manufacturing companies, one area does seem to predict future stock price growth: the previous five-year revenue growth. The top 50th percentile of my backtest had an excess of 28% revenue growth in the previous five years. The sales growth rate for Lucent has been an anemic 14.15%, compared to 34.99% for its industry. Worse, its sales growth for the most recent quarter was only 0.64%, and the explanation from management was somewhat limited.

We can keep looking at numbers, but I find the lower revenue growth compared to other companies in the industry rather disturbing. I also am not comfortable with what occurred with the growth of inventory and accounts receivable. So, am I going to stop my Drip in Lucent? Am I going to sell my holdings? Right now, I am going to continue with my present course.

However, looking at the cold, hard facts, I feel uneasy about sending them money every month. Rising inventories and accounts receivables over time makes me anxious. Add this to the drop in revenue in the last quarter (with the lame explanation from management), and I really am coming to the conclusion that my funds could be deployed elsewhere more efficiently. It may be time to consider a company with an easier-to-understand business model, and numbers that look good overall.

Last week, Jeff Fischer wrote a very good column about how many of us are allowing technology to take control of our lives. I suggest you go back and read it if you haven't already. The technology that let me take my family this weekend to the beach and at the same time write and submit this column is also responsible for sucking us away from the "real world" that we live in. I had to fight the urge to spend hours on the message boards instead of getting out and into the ocean. Maybe it's time to turn off the cell phone, or disconnect ourselves once in a while from our cable modems. Let's use this stuff as our servant, and not become a slave to it.

It's time to pack up and check out of the motel, so I'll see you all in the Drip Companies board, and if you get a chance, join us in the new board, Building and Maintaining a Home. Until then, stay Foolish.

Drip Portfolio

4/3/2000 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP-1/16$30.69
INTCINTEL CORP-1 5/16$130.63
JNJJOHNSON & JOHNSON2$72.25
MELMELLON FINANCIAL CORP2$31.75

  Day Week Month Year
To Date
Since
7/28/1997
Annualized
Drip 1.14% 1.14% 1.14% 16.59% 51.47% 16.72%
S&P 500 .49% .49% .49% 2.50% 60.42% 19.24%
S&P 500(DA) .49% .49% .49% 2.50% 63.04% 19.96%
S&P 500(DCA) n/a n/a n/a n/a 32.66% 11.10%
NASDAQ -7.64% -7.64% -7.64% 3.79% 169.10% 44.57%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/199722.9859INTC45.653$130.63186.13%
11/5/199831.5773MEL34.290$31.75-7.41%
11/14/199713.323JNJ79.310$72.25-8.90%
4/13/19988.269CPB54.401$30.69-43.59%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/199722.9859INTC$1,049.37$3,002.53$1,953.16
11/5/199831.5773MEL$1,082.79$1,002.58($80.21)
11/14/199713.323JNJ$1,056.65$962.59($94.06)
4/13/19988.269CPB$449.84$253.75($196.08)
  Cash: $24.47  
  Total: $5,245.92  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.