Is Alcatel-Lucent a Dangerous Investment?

With shares of Alcatel-Lucent (NYSE:ALU) trading at around $1.39, is ALU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Lets analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stocks Movement

Deutsche Bank recently upgraded Alcatel-Lucent from Hold to Buy. This was primarily related to the new CEO Michel Combes. He has a successful history of cutting costs. He will reveal his cost-cutting plan in June, which Alcatel-Lucent longs eagerly await. Combes will likely want to make some radical moves, but its possible that the board will get in the way. Well see how it all plays out.

At the current time, there are many negatives for Alcatel-Lucent. They include:

  • A lack of products generating impressive revenue
  • Recent history of missing expectations
  • Consistent decline in annual revenue
  • Weak margins
  • Poor cash flow
  • European weakness
  • Poor stock performance in bull market
  • Burning through cash
  • China slowing

It doesnt look like a good situation, but a new CEO does offer hope. Well get to an opinion later. For now, lets get to some comparative numbers. The chart below compares fundamentals for Alcatel-Lucent, Ericsson (NASDAQ:ERIC) and Cisco Systems (NASDAQ:CSCO). Alcatel-Lucent has a market cap of $3.09 billion, Ericsson has a market cap of $38.10 billion, and Cisco has a market cap of $110.91 billion.

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ALU

ERIC

CSCO

Trailing P/E

N/A

44.31

11.96

Forward P/E

136.00

13.29

9.90

Profit Margin

-9.51%

2.54%

19.72%

ROE

-58.06%

4.18%

17.78%

Operating Cash Flow

-$240.81 Million

$3.31 Billion

$11.87 Billion

Dividend Yield

N/A

2.60%

3.20%

Short Position

N/A

N/A

0.29

 

Lets take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Alcatel-Lucent is weaker than the industry average of 0.30.

Debt-To-Equity

Cash

Long-Term Debt

ALU

1.79

$6.38 Billion

$6.23 Billion

ERIC

0.22

$11.74 Billion

$4.56 Billion

CSCO

0.29

$46.38 Billion

$16.29 Billion

 

T = Technicals Are Weak

Alcatel-Lucent saw a nice pop earlier in the year, but it faded quickly. Alcatel-Lucent has also performed poorly over during a strong bull market over the past three years.

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1 Month

Year-To-Date

1 Year

3 Year

ALU

-8.67%

-1.44%

-29.74%

-58.98%

ERIC

-8.73%

20.00%

31.45%

17.28%

CSCO

-5.15%

5.84%

7.50%

-19.95%

 

At $1.39, Alcatel-Lucent is trading below its 50-day SMA and 100-day SMA, but above its 200-day SMA.

50-Day SMA

1.46

100-Day SMA

1.43

200-Day SMA

1.30

 

E = Earnings Have Been Weak

Revenue has declined over the past several years. This is extremely rare, and its a red flag. Earnings have also been inconsistent.

2008

2009

2010

2011

2012

Revenue ($)in billions

23.64

21.14

21.22

19.88

19.33

Diluted EPS ($)

-3.38

-0.33

-0.20

0.54

-0.82

 

When we look at the previous quarter on a year-over-year basis, we see a very slight improvement in revenue, but a significant drop in earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in billions

5.47

4.24

4.49

4.66

5.48

Diluted EPS ($)

0.38

0.19

-0.14

-0.08

-0.80

 

Now lets 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 Do Not Support the Industry

Competition is much stronger now than it had been in past years, there is strained spending throughout the industry, and macro uncertainty will have an impact.

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Conclusion

Is a turnaround possible for Alcatel-Lucent? Yes. Is a turnaround likely for Alcatel-Lucent? No. It could make a good trade if the new CEO can sell a plan that will cut costs to improve the bottom line, but its unlikely that any plan will lead to sustainable success.

It would make little sense to be invested in Alcatel-Lucent in this economic environment. There are better options available. Cisco is one example. Cisco might not thrive in a bear market, but it will weather the storm much better than Alcatel-Lucent. Cisco also offers a 3.20 percent yield.

Investing is all about logic, and this isnt a logical investment. Alcatel-Lucent has had many reasons for hope over the past several years, and none of them came to fruition. If Alcatel-Lucent cant perform well in a raging bull market, thenwhy wouldit perform well in a bear market?

There might be a good trading opportunity for Alcatel-Lucent in the coming months, but over the long haul, its a STAY AWAY.

Using a solid investing framework such as this can help improve your stock-picking skills. Dont waste another minute click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

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