Is Alcatel-Lucent Poised to Move Higher?

With shares of Alcatel-Lucent (NYSE:ALU) trading around $3, 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:

T = Trends for a Stock’s Movement

Alcatel-Lucent is a France based company that proposes solutions used by service providers, businesses, and governments worldwide to offer voice, data, and video services to their own customers. It is also engaged in mobile, fixed, Internet Protocol, optics technologies, applications, and services. The company operates in three business segments: Networks; Software, Services and Solutions, and Enterprise. As consumers and businesses continue to connect at an increasing rate, communications companies like Alcatel-Lucent stand to see rising profits. However, the company must adapt to new technologies if they are to see a rising consumer base.

Alcatel-Lucent, the French maker of network equipment, will cut 10,000 jobs as part of a restructuring plan by CEO Michel Combes as he seeks to make the company profitable. The job cuts, which will be completed by 2015, are expected to save Alcatel $1.2 billion, according to Bloomberg. Alcatel has suffered from lower equipment prices, competition with China’s Huawei Technologies, and reduced investment from European wireless carriers. The cuts will happen worldwide and account for 14 percent of the company’s workforce.

T = Technicals on the Stock Chart Are Strong

Alcatel-Lucent stock has been exploding to the upside in the last several months. The stock is currently trading near highs for the year but may need time to digest gains from a recent run. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Alcatel-Lucent is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

ALU

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Alcatel-Lucent options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Alcatel-Lucent Options

71.36%

96%

94%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Alcatel-Lucent’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Alcatel-Lucent look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-133.84%

-254.09%

-423.67%

-171.56%

Revenue Growth (Y-O-Y)

6.73%

-3.17%

0.94%

-7.32%

Earnings Reaction

3.25%

-1.42%

-7.55%

-9.90%

Alcatel-Lucent has seen decreasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Alcatel-Lucent’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Alcatel-Lucent stock done relative to its peers, Cisco (NASDAQ:CSCO), Nokia (NYSE:NOK), Ericsson (NASDAQ:ERIC), and sector?

Alcatel-Lucent

Cisco

Nokia

Ericsson

Sector

Year-to-Date Return

152.50%

15.12%

67.09%

28.91%

43.67%

Alcatel-Lucent has been a relative performance leader, year-to-date.

Conclusion

Alcatel-Lucent is a provider of mobile and communications solutions to growing businesses and consumers worldwide. The company is set to cut a significant number of jobs due to a planned restructuring. The stock has been exploding higher in recent months but may need time to digest recent gains. Over the last four quarters, earnings have been decreasing while revenues have been mixed, which have produced conflicting feelings among investors. Relative to its peers and sector, Alcatel-Lucent has been a year-to-date performance leader. WAIT AND SEE what Alcatel-Lucent does this quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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