ALU to Trade at Historical Norm

Alcatel Lucent (ALU) reported stronger revenues for the fourth quarter of 2007, although its earnings were hit by a goodwill impairment charge of 2.5 billion ($3.65 billion) due to the perceived reduction in asset values of CDMA and IMS divisions. The company is proceeding on its restructuring plans by streamlining layers of management and it completed 6,700 job cuts.

We have increased our revenue estimates while maintaining our previously lowered earnings estimate for 2008 due to the continued pricing pressure and the geographic mix of growth as the company competes to win business in Asia based on price. We rate ALU a Hold with a target price of $6.10 per share or 10.7x our 2008 adjusted EPS estimate, which is closer to its historical norm.

Standard & Poor's has revised its rating outlook on the company to stable from positive which means that it is less likely to be raised in the next two years implying a higher cost of borrowing. We have increased our revenue estimates and we have maintained our previously lowered earnings estimates for 2008 due to the continued pricing pressure and the geographic mix of growth as the company competes to win business in Asia based on price. Despite the negatives which also include possibility of a consumer-driven recession in the U.S., we believe the shares have incorporated all the negatives surrounding the company and the industry.

Udayan Mukherjee contributed to this report.

Fair Value $50 for Credit Suisse

We are continuing our Hold on Credit Suisse Group (or
CSG) (CS), but reducing our target price to $50. CSG posted fourth quarter earnings of CHF1,329 million, down 49% year over year. This reflected CHF1.3 billion in writedowns at the investment banking group in structured products and leveraged loan commitments related to credit market turmoil, as well as CHF774 million in valuation reductions at asset management.

Also, we are cutting our 2008 EPADS estimates to $5.85 from $7.18. We expect results to continue to reflect problems stemming from weakness in the subprime mortgage and other credit markets. CSG has repurchased CHF4.1 billion under a CHF8 billion share repurchase program and just increased the dividend by 12%.

At its current stock price, Credit Suisse trades at substantial discounts to the industry median, based on 2008 and 2009 consensus estimated earnings and price/book. The 3-5 year outlook for CSG's earnings growth is 10% versus 12% for the industry, while CSG's dividend yield of 4.9% is above average.