Is Alcatel-Lucent Likely to Outperform?

With shares of Alcatel-Lucent (NYSE:ALU) trading at around $1.66, is ALU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

AlcatelLogo2CEO Ben Verwaayen will be departing once a new CEO is put in place. Most investors are pleased by the news of his departure. However, this doesn’t mean that a new CEO will do any better. A lot of Alcatel-Lucent’s situation stems from the industry at large.

Regardless of the reason for the stock’s poor performance over the past few years, FY2012 revenue was down 5.7 percent compared to FY2011. The company also swung back to a loss in 2012. For Q4, there was a net loss of 80 cents per ADS on $5.3 billion in revenue. Also for Q4, the company saw year-over-year revenue declines in the network segment and enterprise business. Gross margins also decreased by 40 basis points. On the other hand, S3 segment revenue increased and operating expenses decreased.

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Alcatel-Lucent is in the midst of an aggressive cost-cutting program. Perhaps most important is that Alcatel-Lucent is planning on exiting unprofitable partnerships. Only 25 percent of the company’s outsourcing contracts are profitable at the moment. This strategy will likely lead to lower revenues and stronger profits. Some traders might look at this as a negative, but if you’re looking at the actual business, it’s a wise move.

Let’s take a look at some important numbers prior to forming an opinion on the stock…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Alcatel-Lucent barely qualifies as normal. In other words, it’s on the weak side of normal. The balance sheet is solid.    

Debt-To-Equity

Cash

Long-Term Debt

ALU

1.14

$6.09 Billion

$6.19 Billion

JNPR

0.14

$2.85 Billion

$992.20 Million

ERIC

0.21

$11.52 Billion

$4.30 Billion

 

T = Technicals on the Stock Chart Are Mixed

Over one-year and three-year time frames, Alcatel-Lucent has underperformed Juniper Networks (NYSE:JNPR) and Ericsson (NASDAQ:ERIC). Ericsson is the only company of the three to offer yield, which is currently 2 percent.

1 Month

Year-To-Date

1 Year

3 Year

ALU

1.84%

19.42%

-24.20%

-47.80%

JNPR

7.59%

11.03%

-3.87%

-12.71%

ERIC

17.70%

19.80%

26.30%

28.67%

 

At $1.66, Alcatel-Lucent is currently trading above all its averages. This is good news, but there was an assist from Goldman Sachs (NYSE:GS) and Credit Suisse Group (NYSE:CS) with a $2.1 billion line of credit, which helped the stock move higher.

50-Day SMA

1.46

100-Day SMA

1.27

200-Day SMA

1.33

 

E = Earnings and Revenue Have Been Inconsistent          

As stated earlier, FY2012 revenue was down 5.7 percent compared to FY2011. Now let’s take a look at previous years as well.

2007

2008

2009

2010

2011

Revenue ($)in billions

25.98

23.64

21.14

21.22

19.88

Diluted EPS ($)

-2.14

-3.38

-0.33

-0.20

0.54

 

We already know what happened this quarter. Now let’s take a look at previous quarters as well.

9/2011

12/2012

3/2012

6/2012

9/2012

Revenue ($)in billions

5.23

5.47

4.24

4.49

4.46

Diluted EPS ($)

0.11

0.38

0.19

-0.14

-0.08

 

Let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Let’s look at this from a geographical standpoint. When it comes to revenues, Alcatel-Lucent is seeing a low double-digit decline in Asia (China is actually weaker than Japan in this case) and Europe. However, there is strength in Brazil, the Middle East, Africa, and even North America.

Conclusion

Is Alcatel-Lucent aware of the massive cost-cutting it will need to implement in order to have a sustainably profitable business? Yes. Is this good news for the company? Yes. Is it good news for the stock near-term? That remains to be seen. Though impossible to predict, it’s most likely that Alcatel-Lucent will continue trading at these levels for the foreseeable future. With a forward P/E of 55.33 and downsizing in the works, it’s not a time for optimism. Alcatel-Lucent remains a high-risk/high-reward stock. Therefore, it’s a WAIT AND SEE.

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