Is Alcatel-Lucent a Buy After Recent News?

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 it is to see a rising consumer base.

Alcatel-Lucent CEO Michel Combes has warned that the company is in trouble, having steadily incurred losses since Alcatel merged with Lucent in 2006. The French-American wireless company has missed key technological changes and announced it’s cutting 10,000 jobs despite protests from the French government. “This company could disappear,” Combes told Europe 1 radio, according to Reuters. Alcatel-Lucent saw 1,500 workers protest in Paris on Tuesday against the job cuts.

T = Technicals on the Stock Chart Are Strong

Alcatel-Lucent stock has been declining in the past several years. The stock is currently surging higher and trading slightly below yearly highs. 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 signals neutral to bullish price action in the near-term.

ALU

Source: Thinkorswim

Taking a look at the implied volatility 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

73.8%

86%

84%

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

November Options

Flat

Average

December Options

Flat

Average

As of Wednesday, there is 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.

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%

-9.9%

Alcatel-Lucent has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have not been pleased with 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), and Ericsson (NASDAQ:ERIC) — and sector?

Alcatel-Lucent

Cisco

Nokia

Ericsson

Sector

Year-to-Date Return

162.6%

17.33%

76.33%

28.61%

40.67%

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. A warning that the company may be in trouble may be a negative catalyst for the company. The stock has been surging higher in 2013 and is currently trading slightly below highs for the year. Over the last four quarters, earnings have been decreasing while revenues have been increasing, which has not pleased investors in the company. Relative to its peers and sector, Alcatel-Lucent has been a year-to-date performance leader. Look for Alcatel-Lucent to continue to OUTPERFORM.

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