Description

Stock Price $0.96

Cash per share $0.55
Debt per share $0.41

Book Value $0.45


Book value is mostly property, plant & equipment. Long term debt is mostly an issue of convertible subordinated debentures due in 2009.

Agere was spun out of Lucent in 2001. Like most technology companies, it has been battered into near oblivion. So the question is, why Agere?

Agere is a leading communications IC semiconductor company with a significant product line and market share. There are two divisions as follows:

CLIENT SYSTEMS

Client Systems sells chips into customers such as Lucent, Seagate and Maxtor.

This is the larger division and one of the reasons I find the stock attractive. Here are summary financials for this division:

Sep 02 Jun 02 Sep 01

Revenue 330 330 302
Gross Profit 140 94 65
Operating Profit 54 0 (50)

Notwithstanding the extraordinarily difficult operating environment, revenues have increased year over year. Gross profit has been restored to a relatively normalized level, and operating profits have rebounded meaningfully.

Unlike many other sub-$1 stocks, Agere has meaningful revenues and operating profits to work with.


INFRASTRUCTURE

Sep 02 Jun 02 Sep 01

Revenue 199 230 298
Gross Profit (21) (31) (55)
Operating Profit (156) (174) (253)

The Infrastructure Division sells into the telecomm world and is clearly hurting. Having said that, the company has recently reached an agreement to sell 77% of its optoelectronics segment to Triquint for $40 million. Optoelectronics was responsible for significant portion of the losses. Restated for the sale of opto, pro forma results would look more like this:

Sep 02 Jun 02

Revenue 161 168
Gross Profit 39 25
Operating Profit (64) (80)


Clearly a much better picture showing revenue stabilization as well as gross margin and operating margin improvement.


OPERATING SUMMARY

Significant year/year improvement in Client is now generating reasonable profitability, but this is being masked by continuing losses in Infrastructure. Infrastructure has just sold (not yet closed) the most problematic segment, which will allow losses to decline considerably.


BALANCE SHEET SUMMARY

Balance sheet is good enough. Cash is expected to trough in late '03 at near net zero. Financing is long term and secure.


VALUATION SUMMARY

Agere sells at a 70% of revenues which is perhaps a 50% discount to its peer group.


WHAT IS THE STOCK WORTH ?

Hard to really know, but clearly higher depending on a number of variables. Even in this environment, $2.50 seems a good initial target level.

Catalyst