Will Combes’s ‘Shift’ Plan Help Alcatel-Lucent See a Turnaround?

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 is making a last-ditch effort to save the company by raising $1.3 billion from shareholders and $750 million from a high-yield bond in order to reduce Alcatel’s debt, according to Reuters. The moves, announced Monday, are part of Combes’s “Shift” plan announced in June. Alcatel has been struggling to compete against rivals like Ericsson (NASDAQ:ERIC) and Nokia (NYSE:NOK) for years. There have even been recent rumors that Nokia may be interested in buying the company.

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 near highs for the year. 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

64.35%

13%

11%

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

Put IV Skew

Call IV Skew

December Options

Flat

Average

January Options

Flat

Average

As of Monday, 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 minimal 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-35.71%

-133.84%

-254.09%

-423.67%

Revenue Growth (Y-O-Y)

1.89%

6.73%

-3.17%

0.94%

Earnings Reaction

16.06%

3.25%

-1.42%

-7.55%

Alcatel-Lucent has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had mixed 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 and Ericsson – and sector?

Alcatel-Lucent

Cisco

Nokia

Ericsson

Sector

Year-to-Date Return

173.4%

15.07%

97.59%

18.61%

44.75%

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. Combes is making a last-ditch effort to save the company by raising $1.3 billion from shareholders and $750 million from a high-yield bond in order to reduce Alcatel’s debt. The stock has been surging higher in 2013 and is currently trading near highs for the year. Over the last four quarters, earnings have been decreasing while revenues have been increasing which has led to conflicting feelings among 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.

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.