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By: Ahmed Ishtiaq

Alcatel-Lucent (NYSE:ALU) is one of the most volatile stocks in the market. Over the past six months, the stock has jumped up and down countless times, and it looks like the trend will continue in the near future. Recently, the company announced its earnings, and as expected, the results were not impressive. Bad earnings could have eaten up the gain ALU accumulated, but the bad news was accompanied by slightly better news. Unimpressive earnings figures were expected due to the ongoing mess at the company and poor performance of the sector overall.

However, the decision of the CEO, Ben Verwaayen, to step down from his post worked as a positive for the company. Investors were happy about the decision and did not put too much focus on the earnings announcement. There is no guarantee that the new CEO will be able to perform better; nevertheless, the news was welcomed by investors. As a result, ALU was able to hold on to the gains it has accumulated. Good news for ALU is mostly accompanied by bad news; however, there are some developments that may turn out to be extremely beneficial for the company.

Developer of World's Most Powerful Broadband Infrastructure

Recently, Alcatel-Lucent and France Télécom-Orange (FTE) deployed the World's most powerful broadband infrastructure, an optical link supporting 400 gigabits-per-second between Paris and Lyon. The service is currently being provided only to researchers, and the companies plan to expand services to business and private customers later. The new optical link uses 44 wavelengths, and it is four times faster than the current maximum bandwidth available. Furthermore, the optical link can transmit up to 17.6 terabits per second (Tbps). According to some reports, video now accounts for more than half of all the Internet traffic worldwide.

According to Cisco (NASDAQ:CSCO), there will be 1.2 million minutes of videos streamed or downloaded every second by 2016. By deploying this optical link, Alcatel-Lucent has positioned itself ahead of other participants. Usually, consumers do not have access to such optical links; they are given access to smaller lines that represent a tiny proportion of the potential of the entire line. Nonetheless, a small portion of this optical link will put today's high speed Internet to shame.

Expanding Business, New Projects and a Bite at the Cloud Computing

In my previous articles, I have mentioned that the company has one of the best R&D teams in the industry. Alcatel-Lucent still manufactures some of the best equipment in the industry. In my opinion, the biggest positive about the company is its strong portfolio of products and R&D team. The company has been able to retain and attract new customers. The main reason for the slump, I believe, was the failure to achieve synergies from the merger, coupled with the poor condition of the networking industry. However, the networking industry is showing signs of recovery, and ALU is working towards increasing revenues.

Recently, Chorus New Zealand, the largest telecommunications infrastructure company in the country, chose Alcatel-Lucent as a partner. Chorus chose Alcatel-Lucent for their open access fiber services. The contract is worth NZ$ 929 million (USD 790 million). In addition, the company will help Belgacom, Belgium's leading service provider, expand its infrastructure. Belgacom is facing exponential growth in demand for bandwidth from consumers, businesses and data centers. Alcatel-Lucent will also help Belgacom enhance its cloud computing services. Cloud computing is the most lucrative segment at the moment, and companies like Cisco Systems are trying to exploit this segment. Alcatel-Lucent will also have to take advantage of this opportunity in order to regain its previous place among its peers.

Comparison with Peers

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

ALU

CSCO

JNPR

Forward P/E

N/A

13.50

17.60

P/B

1.30

2.10

1.50

P/S

0.20

2.40

2.40

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

Source: Morningstar

ALU has reported negative earnings for a while now, which renders its P/E meaningless. Cisco has shown some improvement over the past two quarters and currently trades at a discount compared to JNPR. On the other hand, the margins of ALU are poor compared to its competitors. Debt-to-equity ratio is also substantially higher than its competitors.

Summary

ALU is not a stable stock with a smooth trend; it is a stock with a lot of volatility and substantial risk. It is true that there is considerable upside potential if the company can build on recent gains. I am cautiously optimistic about ALU, due to the strong R&D team and solid products portfolio. There is high risk involved with this stock, however, I believe it can reward patient investors. As I have mentioned before, the company can achieve success by making small changes, and these changes can start happening if the company is able to appoint an able CEO.

Source: Alcatel-Lucent: Rocky Ride With A Chance Of Handsome Profits