Lucent Data Strong, but Playboy No Longer Sexy

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Lucent Technologies (LU)

Jim: Not long ago, Mike, my mom asked me to suggest a stock for her. With no hesitation I mentioned Lucent, which I suppose tells you plenty about how I feel about this company.

Mike: But you have to wonder, is there any company in corporate America today with more boring TV commercials than those Lucent spots showing someone laboriously typing out Lucent's ad slogans?

Jim: Lucent, of course, is the successor to the former Bell Labs unit of AT&T; Corp., and it's still a leading maker of telecommunications-switching equipment with more than $30 billion in annual revenue.

Mike: AT&T; spun it off in 1996.

Jim: Right, and Lucent's stock has been sizzling ever since. Get this: The stock has soared more than sevenfold since the spinoff, while the Standard & Poor's 500 index has only doubled in value. Even so, I still think it's a rock-solid stock, and I'd buy it as a long-term investment.

Mike: I agree with you, but I would put a special emphasis on the phrase "long term." Because while Lucent is well-positioned in a lot of telecom equipment and supply sectors, it's still got work to do in what's likely to be the most important sector, and that's network switching hardware.

Jim: Where Cisco Systems reigns.

Mike: Right, even though Cisco is much smaller than Lucent in sales.

Jim: OK, but first let's explain what this equipment does.

Mike: This is the gear that makes packets of digital data go where they need to go over the Internet and local networks--whether the data are moving within an office network or from one end of the Web to your home or what have you. And this is going to be one huge business, as you can see by the growth of the Net.

Jim: Lucent isn't standing still, though. It recently bought Ascend Communications to make itself a bigger player in that arena.

Mike: But it's got a long way to go, and it's got ferocious competition even beyond Cisco. There's also Nortel Networks, a Canadian company formerly called Northern Telecom that has also bulked up in that sector by acquiring Bay Networks. But all that being said, Lucent is a strong company with good management and a great record in engineering.

Jim: What I like about Lucent is how it's covering all its bases. The company wants to be the networking supplier for everything, whether it be data, voice or video, and I believe it's laying the groundwork to be a major player in all those fields.

Mike: And that's very important. Think about this: It's a good guess that most communications are going to migrate one way or another to the Internet over the next decade or two. That's because most communications are going to consist of data, not voice, and the Internet is the optimal way to carry the data.

Jim: In other words, we could see the demise of the long-distance telephone system as we now know it?

Mike: Right. There's no question that Lucent's voice communications franchise is not going to be worth as much in the future as it is today. But it's clear that Lucent understands this conundrum and is trying to address it.

Jim: And growing nicely in the meantime.

Mike: Another thing I'll note is Lucent's top management. It's led by a guy named Richard McGinn, and he's one of these hard-charging executives who make their companies hum. I'm not sure I'd ever want to have to report to him, but as a stockholder I sleep better knowing that my stock is in his hands.

Jim: Now there's no overlooking that this stock trades for a very handsome price, about 53 times estimated 1999 earnings per share. That means if Lucent trips, its stock is vulnerable to a nasty drop.

Mike: We've seen that. In recent quarters, investors have feared that Lucent's revenue--though growing smartly--wasn't growing as fast as expected, and the stock came under pressure. But the shares rebounded because investors generally believe this is a stock worth paying up for.

Jim: Here's something else: While we're waiting for future communications trends to play out, Lucent's international business is on fire, and that's with several major economies in the world still on their backs. As those economies rebound, it can only add to Lucent's pace.

Mike: Agreed. Simply put, I believe telecommunications is a good place to be as an investor, and Lucent is a good horse to have in that race.

Playboy Enterprises (PLA)

Jim: I guess my mom can stop reading now.

Mike: Yeah, and given that Playboy talks about positioning itself as an adult version of Disney, maybe Michael Eisner should stop reading here too.

Jim: You ever read Playboy's financial statements? They're amusing. For instance, when it describes its magazine, it goes on forever about all the great articles and interviews it carries, and only at the end does it mention, oh yeah, it also has pictures of women. It's almost as though it really believes that old joke about how men mostly read the magazine for the articles.

Mike: Do I take it, then, that you only read Playboy's annual report for the numbers?

Jim: Here's another little fact in there: Playboy last year spent $4.3 million for the upkeep of its mansion in Los Angeles, which is equal to the entire earnings of the entire company for the entire year. That tells you a lot about where this company is going, or not going.

Mike: You're right. Let's start with Hugh Hefner, who requires no introduction. He still has about 70% voting control of this company, and that makes him the 800-pound gorilla in pajamas, because Playboy is still being run in many ways as his personal fiefdom.

Jim: Of course, his daughter, Christie, has been chief executive for many years--too many, in fact.

Mike: I guess she just can't say no to Dad.

Jim: Jokes aside, this company has been a dud for more than a decade, and no matter which way it tries to lessen its dependence on the magazine, it just doesn't seem to work. That '98 profit I mentioned? It amounts to a tad over 1% of Playboy's $317 million in revenue that year. Shoot, supermarkets do better.

Mike: Perhaps Hugh doesn't need a better return because he's already got the mansion.

Jim: This stock has long been a laggard, but every so often the bulls get excited about Playboy, and we've seen it again recently. It's gained nearly 40% in the last 12 months, presumably on expectations that Christie might finally be steering Playboy toward some growth businesses in new media.

Mike: The market bought this line of chatter for a while. But its enthusiasm is fading, and I'd avoid this stock.

Jim: Me too. Playboy to me has wasted its enormous brand recognition, and I'm not sure it can catch up. This seems like a tired, uninspired company that's not sure where it's going and isn't very profitable in the meantime.

Mike: Playboy has been moving further into cable TV and other non-magazine media lately. It bought Spice, which is another adult channel. It's involved in pay-per-view programming, videos, the Net and is planning a casino. But all of those non-publishing interests still amount to less than 30% of Playboy's business. And let's face it, in the online and cable worlds today, there's no dearth of skin.

Jim: Playboy faces horrific competition, especially on the Internet.

Mike: Where the barriers to entry, for even more competitors, are very low and very cheap. These are also spheres in which the Playboy name and the bunny symbol pack not a bit of punch.

Jim: In the meantime, the U.S. circulation of Playboy magazine is around 3 million, or half what it was 20 years ago, and it can't keep carrying this operation.

Mike: By the way, Playboy is talking about licensing its brands and various logos to apparel makers and the like.

Jim: Oh no.

Mike: Now I don't know about you, but to me a guy who walks around with a little bunny symbol on his breast pocket is not exactly advertising his hipness. In 1956, maybe, but not 1999.

Jim: Ditto Hugh and his pajamas. Every time I see him in that outfit, I think of eight-track stereo.

Mike: Maybe that's coming back too. But it's not the way to bet.

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Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book "Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age." Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik's weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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Playboy Enterprises, Monday: $25.44

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Lucent Technologies, Monday: $64.63

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