(MONEY Magazine) – THIS MONTH:

--AT&T's long distance isn't connecting.

--Lucent's telephone equipment will dazzle.

--NCR could prosper on its own.

--This zero sports a special tax advantage.

Since AT&T began its long-awaited break-up in April by selling 18% of Lucent, its equipment-manufacturing arm, both stocks have stunned investors. Shares of AT&T have fallen 14% to $38.75 at a time when the Dow Jones industrial average was rocketing up 750 points, or 13%. By contrast, Lucent stock has soared more than six times as fast as the Dow, gaining 85% to $50.

Continuing its restructuring, in September the telecommunications giant spun off the remaining 82% of Lucent. The final step in the breakup follows at the end of December, when AT&T spins off its troubled computer business, NCR. At that point, each of the three pieces will trade independently--and each will present considerably different prospects.

Because AT&T is still the most widely held U.S. stock, with more than 3 million shareholders, many investors will have to decide whether to hold or sell each of the three pieces. Other investors will doubtless be wondering whether they should buy any of them. After all, Lucent is a darling of investors, AT&T is troubled but retains an exceptionally valuable franchise, and NCR might learn to stand on its own two feet once it's set free of Ma Bell.

As the rest of this story explains, all three pieces of AT&T are worth hanging on to if you already own them. It probably doesn't make sense, however, to buy any of the three right now. Here's a look at each of them:

AT&T (ticker symbol: T; recently traded on the New York Stock Exchange for $38.75; 3.4% yield). Times are tough for America's phone giant, which has estimated 1997 revenues of $60 billion. AT&T's entire breakup plan was based on creating a pure telecommunications firm that would combine data transmission, business services and cellular telephony with traditional long distance.

Trouble was, the core long-distance business continued to slip in 1996. Traditional rivals such as MCI and Sprint and new competitors such as local-phone operator GTE have eaten into AT&T's long-distance market share, which has fallen 10 percentage points to 53% during the past five years. As a result, long-distance revenues have grown at a paltry 2%, vs. the overall market's 9%. Even worse, AT&T's costs have risen, cutting the firm's operating profit margin from 19% late last year to 17.2% this year, according to Merrill Lynch analyst Richard Toole.

One of the reasons for these woes: the company's confusing rate plans. "AT&T still needs to simplify its rates to stabilize market share," explains Charles DiSanza of Gerard Klauer Mattison in New York City. The company's new One Rate plan seemed designed to do just that but was followed by a November rate hike of 5.9%. Such contradictory moves make analysts question whether AT&T has settled on a workable long-distance strategy.

Turmoil in top management only adds to the sense of chaos. On Aug. 19, president Alex Mandl was hired away by Associated Communications with a $1 million annual salary, a $20 million signing bonus and an 18% equity stake valued at more than $30 million. Investors expected that Mandl's replacement, who would be in line to succeed Robert Allen as AT&T's chairman within a year or so, would be a superstar. Instead, they were disappointed when John Walter, the former CEO of R.R. Donnelley & Sons, was hired, since Walter has no real telecommunications experience.

Nonetheless, many analysts expect that AT&T will remain an industry leader in long distance as well as in higher-growth businesses such as wireless services. "The company is slowly transforming itself from a stodgy monopoly to a nimble competitor," says David Otto of Edward Jones in St. Louis.

A particular bright spot is the cellular division, which is the dominant player in an industry that is now expanding 35% a year. The industry will likely continue to grow more than 20% annually during the next five years, because only one in 10 Americans currently has a cellular phone, explains Jim Stack, editor of the InvesTech Market Analyst ($160 for 18 issues; 800-955-8500). "AT&T will be a huge player in wireless," adds analyst Linda Duessel at Federated Investors in Pittsburgh.

Analysts figure that the combination of AT&T's basic franchise and the growth potential of new businesses such as cellular can boost earnings at a fairly attractive 11% annual rate during the next five years. However, in light of the short-term problems the company faces, there's no reason to rush to buy. "Right now, there are better places to put your money," says Toole.

Lucent Technologies (LU; NYSE, $50; 0.6%). Investors couldn't be happier with this $26 billion designer and manufacturer of telecommunications systems and software in Murray Hill, N.J. Analysts describe its future as luminous (which happens to be the definition of the company's name).

Lucent makes roughly three out of every 10 telephones, cordless telephones and answering machines sold in the U.S. The company's share for more sophisticated equipment is even larger; Lucent controls 58% of the market for digital switches, for example. And opportunities are greater internationally, where the global telecom-equipment market will grow from $180 billion today to almost $270 billion in 1999, according to James Jungjohann of A.G. Edwards in St. Louis.

Moreover, as an independent company, Lucent is likely to pick up additional business from its former parent's rivals--such as the regional Bells. "In the past, companies that bought from Lucent would have been putting money right into AT&T's pockets, which competitors didn't want to do," says Otto. But that's not a problem now. In July, for example, Bell Atlantic selected Lucent as one of the key suppliers for a fiber-optic network that will cost several hundred million dollars.

Analysts also like the fact that Lucent owns 75% of Bell Labs (AT&T owns the rest), which invented the transistor and the cellular telephone. "With a recent average of 3.2 patents per working day, Bell Labs is the leader in communications technology," says analyst Ted Moreau at Robert W. Baird in Milwaukee.

Overall, Luke Szymczak of Prudential Securities thinks that Lucent's earnings will grow about 25% annually during the next two years. The only catch, analysts say, is that Lucent is now too expensive at 25 times earnings to be a compelling buy.

Even so, current shareholders have good reason to hold on to the stock, and it would certainly be worth buying if the price dipped below $45. "Anyone who wants to be in on the growth of telecom equipment should own Lucent," says Szymczak. He sees the stock rising as high as $60 over the next year, giving investors a 21% total return from current levels.

NCR (NCR; the shares will begin trading on the NYSE after Dec. 11). AT&T shareholders who receive shares of $7.2 billion NCR won't need a crystal ball to predict the likely direction of the stock. All they will have to do is look at historical statistics. Spin-offs post 20% returns, on average, in the 12 months after a company becomes independent, according to a 1994 study by Patrick Cusatis of Lehman Bros. and James Miles and J. Randall Woolridge of Penn State University.

This pattern holds just as true for troubled companies such as NCR as for winners like Lucent. Reason: An independent NCR will be able to focus on cutting costs and improving profitability. "The company has gone from losses of $2 million a day to break even--and did that ahead of schedule," says Duessel.

Reaching this level of profitability depends on abandoning ultracompetitive businesses, such as personal computers, and focusing on areas with fatter profits, such as large-scale data handling and transactions processing. "These are businesses with growth rates of over 20%," notes Duessel.

NCR will be highly speculative in the next few months, though. The reason: Since NCR won't be included in most major stock indexes, many index fund managers who own AT&T will soon sell the NCR shares they receive in the spin-off. "Those sales will put downward pressure on NCR stock for anywhere from six weeks to three months," says John Keeley Jr., manager of the Keeley Small Cap Value fund.

If you receive NCR stock in the spin-off, you will probably want to hang on to it. For each share of AT&T, investors will get only 1/16 of an NCR share, worth an estimated $2.40 to $3.50. You might as well let that loose change ride. But before you sink any real dollars into the firm, you should wait until NCR has reported at least four profitable quarters in a row. Says Salomon Bros. analyst John Jones: "NCR has only two marginally profitable quarters behind it and still has a lot to prove."