Lehman sees end of tunnel for Lucent, Nortel

Lehman analyst Steven Levy painted a picture of stability and hope for Lucent and Nortel and, by extension, the overall telecom equipment industry, at an analyst conference today.

Thanks to significant cost-cutting over the past several months and stabilized spending from its customers, Lehman predicted Lucent would reach breakeven in September of this year, provided it continues to reduce its headcount by about 5000 employees (most of which should occur by March) and assuming customer spending holds up.

Nortel, which has also cut costs drastically, should break even sooner -- by June, said Levy -- largely because it began outsourcing its manufacturing sooner than Lucent. In December, Nortel revised earlier plans to reduce its headcount to 35,000 employees, claiming it now only needed to get down to between 36,000 and 37,000 workers.

. Since the two vendors are bellwethers for their industry, Levy said their turnaround could coincide with a larger telecom turnaround as well.

“As Lucent and Nortel go, so goes the industry,” said Levy.

In January, Lehman raised its view of the wireline equipment sector from negative to neutral, assured that its fundamentals had stopped deteriorating and that the sector’s uncertainties were behind it.

Levy said carrier equipment spending has stabilized in the past few months and that equipment spending as a percentage of carrier capex had also remained steady.

And contrary to recent reports of a possible protracted freeze on Bell infrastructure investment following the FCC’s UNE review, Lehman predicted an increase in carrier spending. “Most carriers are saying their DSL deployments are profitable,” he said. “Now they’ve been given the green light to go after the juiciest neighborhoods.”

Levy said Bells will likely exhibit an “emotional” and “political” reaction to the regulatory compromise handed down by the FCC this month, but added, “They’ll probably cut spending somewhere else.”

However, Levy cautioned listeners that he was not forecasting improvement in the fundaments for the telecom equipment sector anytime soon, and stressed the need for job growth in the national economy to drive an increase in telecom services demand.

Levy also pointed out differences between Nortel and Lucent, such as Nortel’s greater focus on international markets and enterprise customers (Lucent has no enterprise customers, having spun off its enterprise unit as a separate company, Avaya) and Lucent’s emphasis on services as a source of revenue. But despite their differences, Levy said he expects Nortel and Lucent to each see approximately $9.5 billion in revenue this year and follow that with 5% growth in 2004.

Levy also predicted reverse stock splits soon for both Nortel and Lucent, which means, he said, “These $1.50 to $2 stock prices aren’t going to stay for long.”