Lucent's shares have surged during the past two years...

...but the stock is still trading well below its late-90's peak price.

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NEW YORK (CNN/Money) – Remember Lucent? It's back!

Sure, Lucent trades at only about $3.50 a share, more than 95 percent below the stock's all time high in late 1999. (Those were the days.) But $3.50 is a long way from where the stock was in late 2002.

Back then, during the depths of the telecom meltdown, shares traded for less than a buck. Investors were pricing the stock as if Lucent (Research) were about to go out of business -- not that crazy a thought given Lucent's losses and heavy debt load.

But thanks to a splurge in spending on wireless networking equipment during the past two years, Lucent started making money again and was able to clean up its balance sheet.

As a result, the stock surged 125 percent in 2003 and 32 percent last year.

So with Lucent set to report its fiscal first quarter results on Wednesday morning, analysts are actually expecting pretty decent numbers – earnings per share of 4 cents, up from 3 cents a share a year ago and sales of $2.41 billion, an increase of about 7 percent.

But can the stock keep moving?

Shares are trading at about 19.5 times fiscal 2005 earnings estimates. Whether that's cheap or not is open to debtate.

Profits are expected to increase by about 30 percent in fiscal 2005 and 17 percent in fiscal 2006. But analysts are predicting just a 6 percent annual earnings growth rate, on average, for the next five years.

Susan Kalla, an analyst with Friedman Billings Ramsey, thinks the stock is cheap. "A lot of investors have left Lucent for dead," she said. But she adds that it may be tougher for the stock to tack on new gains until there is more proof that the telecom market is really back on track.

"People are still waiting to get more definitive signs of a recovery," Kalla said.

And here is where things start to get murky. Analysts praise Lucent for having cut costs and for making strategic moves to embrace the rapidly growing wireless part of the telecom equipment business.

But there are some concerns that after a robust 2004 and 2005, large Lucent customers Verizon Wireless and Sprint may cut back on capital spending in 2006. Verizon (Research) and Verizon Wireless accounted for 27 percent of Lucent's total revenues in fiscal 2004 while Sprint (Research) accounted for 11 percent.

"This will be a good year for wireless spending but 2006 won't be as good and Lucent is one of the single most companies exposed to that," said Timm Bechter, an analyst with Legg Mason.

Bechter said Lucent will need to increase its presence with larger Asian wireless carriers to offset the risks of a wireless spending slowdown in the United States.

So barring new deals, Bechter thinks that current revenue estimates for fiscal 2006 might be too high.

The Street is calling for sales of $10.4 billion, up about 7 percent from the 2005 consensus estimate of about $9.7 billion. But Bechter thinks sales are likely to come in closer to $10 billion, just a 3 percent increase.

There are also some issues with just how profitable Lucent really is. Kenneth Muth, an analyst with Robert W. Baird & Co., said investors shouldn't ignore the fact that large pension credits due to lower retiree healthcare costs have fueled much of the company's earnings rebound.

Lucent reported a net profit of $348 million in its fiscal fourth quarter but a pension credit of $280 million was a big contribution to profits.

For fiscal 2005, Muth estimates that Lucent will earn 16 cents a share but that only 4 cents of this profit will come from the actual business. Muth said he would like to see healthier profits from operations to get excited about the stock's prospects.

That's because based on a projection of 4 cents a share, Lucent is trading at a much higher multiple than its seemingly cheap valuation of about 20 times estimates.

"In some people's minds Lucent is trading at 20 times earnings but it's more expensive because of the pension credit," Muth said.

So it looks like the easy money has been made already for Lucent investors. The company deserves credit for toughing out a brutal period in telecom. But it needs to win more wireless contracts and start posting earnings increases that aren't primarily the product of pension credits in order for the stock to head higher.

Analysts quoted in this story do not own shares of Lucent and their firms have no investment banking relationships with the company.

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