I believe most investors, even if they don't say so, always hope for the best looking at companies that have a bullish run. Alcatel-Lucent (ALU) was bullish for about three weeks until it topped out during beginning of 2013. People were optimistic - they were hoping the stock would keep running. This is especially true of those who owned the stock. But after it topped out, it dropped back down and now people are focused on the struggle the company continues to have over the last four years.
But 2013 might see a change for ALU. With a change in leadership coming in, business contracts still coming in, and the possible beginning of stabilization in Europe, we might see ALU finally stabilize after four years. Let's take a look at some of these things that I have just mentioned.
A Changing of the Guard at the Top
Even though ALU is still having problems, one of the most radical moves they might have made lately is the replacement of chief executive Ben Verwaayen with former Vodaphone Plc (VOD) executive Michel Combes. Mr. Verwaayen has had a challenging time at the telecom company. Last year the company lost $1.9 billion and he spent four years trying to turn the company around. He was supposed to come in as a breath of fresh air for the company, ALU needed to sign strong leadership and weeks into his tenure, rumors were working that he would work with his former employer BT to secure an outsourcing contract worth millions for Alcatel Lucent. No doubt, directors have become frustrated with his slow turnaround progress. That notwithstanding, Mr. Verwaayen has spent four years slashing and cutting trying to make the company profitable but it continues to burn through cash and struggles with cutthroat competition. Maybe it was just time for him to go. Starting in April, Mr. Combs will be looked to deliver sustainable profitability to the company. He has more than 20 years experience in the telecommunications field on a global level. He has extensive experience in addressing financial transformations within companies and this will be important for ALU as it still struggles through budget cuts.
Wrestling for New Business
With new leadership steering the ship, it is important that the company continue to bring in new contracts and it does not look like that is a problem. Here are some examples of its recent announcement:
- Telenor of Norway has teamed up with Alcatel-Lucent in a long term business relationship in India. ALU will provide management services to Telewings that covers the three "circles" of Gujarat, Maharashtra and Andhra Pradesh. This includes about 257 million people across these three states.
- Not long ago they picked up a $1.8 billion deal for about half of Reliance Communications' management network in India. And now they have announced a deal with Dutch incumbent KPN to manage its fixed line networks. ALU will manage day to day operations and move KPN's existing platform to its own next GEN technology. This is a five year contract.
- ALU also won a contract to deploy an LTE network in northern Iraq from a regional telecom company. Alcatel-Lucent will provide "end to end" LTE solutions which includes a base station, IP mobile backhaul, and elements of its platform.
- LGS Innovations, a subsidiary of ALU, was also awarded a $14.1 million contract to help transition the US Army's Fort Leonard Wood. It is transitioning to a digital voice over Internet protocol (VoIP) data system.
Solid Support in America
Considering 40% of ALU's revenue was generated through the United States and only 28% in Europe, the relationship with AT&T (T) and Verizon Communications (VZ) should help boost the company as new management comes on the scene. European rivals are looking to enter the United States market but ALU strengthened its relationships with the two American-based telecom carriers when it got a shot in the arm with a multi-billion dollar euro loan last December. One of the reasons these long-standing relationships are so important is because carriers are in constant competition to upgrade speed and for this reason wireless gear from ALU is always in demand in the United States.
The relationship between telecom carrier and supplier is a very unique and it is not something that is just pulled apart easily, and this sits well for ALU. Since Alcatel has supplied Verizon through second, third and fourth generations of upgrades, so the relationship is very tight- you can almost call it a partnership.
The Key to European Growth May be Emulating the Latin American Latin American Marketing Strategy
It is my observation that the worst of the European crisis may have passed. There still are hurdles to climb, but I believe we might see Europe start to stabilize here in 2013 and this is good for ALU. The company should see the stabilization of sales of network equipment on the continent. The company has also been successful in Latin America and much of the competitive structure looks very similar. Both markets are fragmented as 2 to 3 carriers compete for market share in each country and low-cost Asian vendors are also creeping in to steal market share. The approach the company has taken in Latin America is to understand the networks, operations in the back offices of its customers, and service capabilities. The company has taken the approach to educate itself so when they approach the company they can offer solutions and systems with the right products that they have. Taking this approach I believe the company is very optimistic that they can gain more market share in Europe.
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Technically Speaking
Having peaked in mid-January through the first week of February the stock pushed up against resistance three or four times but could not push through that 180 point barrier before it regressed. Since it recently reached a good support level at about 1.31, it has lost approximately 24.7% of its value. The recent move down has been very steep as the stock has hugged the lower Bollinger band. While it recently just bounced off of it. The RSI indicator and the MACD indicator are both pushing to their lowest bear levels. The MACD has not finished moving down yet and it looks like this little bounce that the stock is taking will be temporary. I perceive the stock will continue to move down in a bearish pattern while the next strong support level doesn't come until about 1.21.
Alcatel-Lucent may have the right chemistry to turn itself around. The former chief, Ben Verwaayen, spent much of his four years trying to stabilize the company and it appears he has succeeded, so we must give him credit for that I am hoping this has laid the foundation for Mr. Combs to come in (at the right time) and start making the company profitable. As Europe stabilizes and ALU adopts its Latin American marketing strategy it might be able to expand its European market share while it continues to look after ways to cut expenses. With a stable American revenue source this looks like a good winning combination for the company. Let's see if it can follow through.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
