As an investor, I would think about this and get a better feel for the company. When most companies are thinking about expanding and ALU must explore ways to address debt issues because of the present economic conditions. They are in a tough position right now. I believe the company is a good company but present economic conditions make it tough on it to grow and expand in an industry that takes a lot of capital.
Recently, Credit Suisse commented that while Alcatel is likely to burn cash through 2014, its new debt agreement makes it a viable business through 2015. The firm also said that management's long-term sales goals would be difficult to achieve with the effectiveness of operating expense restructuring still questionable.
The new debt agreement announced in mid December entails a $2.1 billion financing deal that is partly backed by its 29,000 patents. This new deal should buy the company some time to cut costs. It needs this time as the company has been plagued by lower spending from equipment buyers like global telecom companies and fierce competition from low cost Chinese rivals. The company burns through an average of $900+ million in euros annually and it continues to plan on cutting $1.25 billion through layoffs and leaving unprofitable countries and contracts by the end of 2013. It is a good plan.
Ridding itself of non-core assets is an important part of making the company more efficient and improving its margins. It is possible it could sell off its submarine cable-laying ships to France Telecom for almost $200 million as one example.
Despite the challenges it faces, Alcatel-Lucent also provided a new guidance for 2015 gross margin in the range of 35-37 percent and an adjusted operating margin of 6-9 percent. Not every one is optimistic about the guidance. Bernstein Research believes it is too optimistic and would like to hear something about cash flow goals which the company has not talked about.
In summary, the refinancing has helped create liquidity, but investors still need to know how the problem of weak profitability and poor cash flow will be cured. The company has good cash reserves but burns through them yearly and also has 2.2 billion in debt repayment in 2015. The refinancing has brought focus to its weak balance sheet and struggling business under intense scrutiny. Burning through that $900+ annual cash reserves does not sit well with me still, even with the refinancing. Analysts believe operating margins will increase slightly in 2013 to 3%.
What do I want to see for the company?
If I were to invest in it, I would want to see the company begin to generate at least break-even cash flow. That would be a start for me to invest in the company.
After an uneventful move through November and into early December we can observe a nice breakout gap that never did refill. After the gap, the stock had two huge increases in value as it presently trades at 1.64. This is almost a 50% increase in value in just 30 days. Unfortunately it is going to be hard to continue moving at this rate. Presently the RSI indicator is signaling an over bought position and this signals a possible pull back ahead. This is the second time it has reached this point. The MACD looks like it wants to continue to move up and it may continue to do that if it pulled back. This second push through the upper Bollinger band could cause a pullback and then even touch the lower band. In any event, I believe the stock will pull back because it has shot up so fast; it cannot keep the same pace of growth.
The Options Play
The stock is presently trading at 1.64 and I am expecting the stock to pull back from its reactionary move up.
- Buy the March 20103 put with a strike of '1.50' (priced at $0.20)
- Net Debit to Start: $0.20
- Maximum Profit: unlimited (or value of stock)
- Maximum Risk: net debit
- Maximum Length of Trade: 2 months
Reasoning behind the Trade
- The stock's reactionary move to the refinancing is just that - reactionary. The stock will pull back from these highs.
- It still has tough issues to face and I do not believe it is ready to sustain a growth spurt.