Another Hurdle In The Way Of Alcatel Lucent Turnaround?

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 |  About: Nokia Corporation (NOK)
by: Efsinvestment

By Ahmed Ishtiaq

There are very few stocks that have been through what Alcatel Lucent (ALU) is going through at the moment. The company has suffered heavily due to the failed merger, high costs and cutthroat competition. The stock recently returned from below $1 per share, and gained almost 100% due to some favorable events, such as obtaining finances to cover debts and prolong the maturity of its debt, which gave it some breathing space. As a result, the stock recovered due to the renewed optimism about the position of the company. However, on the operational front, it is clear that it will take some time for the company to regain its position in the market and become profitable.

In my previous article, I shed some light on how the company can consolidate its position in the market by making small adjustments. ALU still has one of the best R&D teams in the industry and some of the best equipment out there. However, a mix of good and bad news is making this a rollercoaster ride for the shareholders. Recently, the news came out that the CEO Ben Verwaayen will step down as the CEO of the company. Furthermore, the company announced its fourth quarter and full year results.

CEO stepping down; Good News for Alcatel Lucent?

Ben Verwaayen has been serving as the CEO of the company for the past four years. During his time, the company has been through a lot of ups and downs. Verwaayen was brought in to turnaround the company after it failed to capitalize on the merger. The company looked to exploit the networking sector by combining two companies in 2006. However, the networking sector has been under immense pressure during the past six years and revenues for most of the participants have been declining. Verwaayen carried out restructuring efforts, but he was unable to stop the decline of ALU. The company has been reporting losses and negative cash flows for a long time now.

Fourth Quarter and Full Year Results

Alcatel Lucent reported fourth quarter and full year results today. As expected, results were not pretty for the company. The company reported revenues of €4,096 million ($5,541 million), 13.8% higher than the previous quarter. However, revenues for the fourth quarter declined by 1.3%, compared with the same quarter last year. Furthermore, the net loss for the fourth quarter stood at €1,372 million ($1,856 million). Full year revenues were €14,446 million ($19,544 million), 5.7% less than the previous year. Full year gross profit was €4,347 million ($5,881 million), declining by almost 19%. Net loss for 2012 was €1,374 ($1,859 million), or €0.61 ($0.83) per share. The figures for the net loss included a substantial impairment charge related to the assets. The valuation of the assets was conducted at the end of the fourth quarter. Alcatel Lucent charged €894 million ($1,209 million) in impairment charges.

Furthermore, the company reported a restructuring charge of €247 million ($334 million), and a post-retirement benefit plan amendment gain of €169 million ($228 million). In addition, the reported loss amount includes pre-tax purchase price adjustments of €255 million ($345 million). On the cash flows and debt front, the company reported cash of €126 million ($170 million), up from €84 million ($113 million). According to the earnings announcement, the increase was due to an increase in the operating cash flows that stood at €702 million ($950 million). Interest expense, tax, cash outlay for restructuring expenses, contribution to pension plans and capital expenditures were €6 million ($8.12 million), €8 million ($10.82 million), €85 million ($115 million), €62 million ($84 million) and €186 million ($252 million), respectively.

Impairment charges and restructuring expenses have weighed heavy on the financial performance of the company. Alcatel Lucent will have to bear these expenses due to the failure of merger and decline in the value of assets due to the poor performance. Another reason for impairment charges can be lower impairment charge in the previous years. Sometimes companies charge less impairment to enhance the financial results. Impairment calculation involves a great deal of discretion and assumptions, which can play in favor of the management.

Competition

The biggest competitors for Alcatel Lucent are Cisco Systems (NASDAQ:CSCO) and Juniper Networks (NYSE:JNPR). Table below lists some important metrics for comparison.

ALU

CSCO

JNPR

Forward P/E

N/A

13.60

63.70

P/B

1.40

2.10

1.60

P/S

0.20

2.40

2.70

Revenue Growth

-3.40%

8.40%

7.60%

Operating Margin

-4.70%

22.50%

7.10%

Net Margin

6.10%

17.90%

4.30%

ROE TTM

36.30%

16.70%

2.70%

Debt to Equity

1.43

0.30

0.10

Click to enlarge

Source: Morningstar

It is clear from the table that ALU competitors are trading at a discount at the moment. Furthermore, the margins of the company are poor compared to its competitors. Debt-to-equity ratio is also substantially higher than its competitors.

Summary

Poor earnings are surely going to have a negative impact on the stock. However, these earnings figures are not a surprise; in fact, the losses are in line with the market expectation. It is not a secret that the company is suffering due to some poor management and immense competition. ALU stock may lose value as the trading starts today. Poor results and the decision of the CEO to step down will bring considerable uncertainty about the company.

However, I believe the company can carry on its turnaround by making small changes in the R&D approach and management. I explained in detail in my previous article where ALU can get an advantage over its competitors. The networking sector is still growing at a slow rate, and the turnaround will not be easy. However, everything is not lost, and the company has the ability to carry on its recent rise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Efsinvestments is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.