For more than ten years, two technology giants, Alcatel-Lucent (ALU) and Cisco (CSCO), have been out of favor, for good reasons: their revenue growth and earnings margins have been crashed by competition from Hewlett-Packard (HPQ), Juniper Networks (JNPR), Huawei Technologies Co., and VMware (VMW).
In recent moths, the momentum seems to have come back for both companies. Their stocks are trading above the 100 and 200-day moving averages, following a number of positive corporate developments.
Last August, for instance, Cisco announced the cutting of 10,000 jobs or 14 percent of its labor force. Last September, Alcatel-Lucent announced the cutting of 5000 jobs, moving from a decentralized to a centralized business model. And both companies have introduced new models to capitalize on the growth segments of the storage market.
Forward PE (July 2014)
Quarterly Revenue Growth
Quarterly Earnings Growth
Operating Cash Flow
Does it mean that it is time for investors to buy the two stocks?
For Alcatel-Lucent, the answer is definitely not. Though the stock trades at a low PE, the company's financials are nothing to cheer about: negative operating margins; declining revenues, and negative cash flow. For Cisco, the answer is yes. Revenue growth accelerated in the last quarter (from earnings 4.40 to 8.40%) in the last two quarters, helping the company beat earnings estimates in the last quarter. Besides, Cisco 2.7 percent dividends pays investors to ride the company's momentum.
A few words of caution: While Cisco's PE is low and its financials sound, the company has yet to rediscover its innovative trait, which takes a new leadership.
Cisco's innovation strategy is based on strategic acquisitions, the purchase of smaller companies with breakthrough products, a strategy that isn't sustainable. As owners of these smaller companies demand higher and higher premiums to compensate them for the risks they assume - Cisco ends up paying top prices for Net Speed and Growth Networks acquired at the peak of the high-tech bubble. Strategic acquisition further end up being dilutive to existing stockholders when paid with the issuing of new stock - that's how Cisco ended up with 5.5 billion shares.
The bottom line: Alcatel-Lucent's momentum shift seems to be temporary, while Cisco's permanent. That's why I'm long on Cisco, but stay away from Lucent, especially after its recent run up.