Shares of Alcatel-Lucent (ALU) have fallen 11.2% since I authored my article, "I See Alcatel-Lucent Losing Support Near-Term". The stock's underperformance is marked against the fractional gain of the SPDR S&P 500 (SPY) during that span, and the 1.8% slide in the SPDR S&P Telecom (XTL). For ALU to get to my downside limit of $1.20, it still needs to shed roughly $0.15 from Tuesday's close or 11% more, but it's near the mid-teen decline I was looking. Given developments in Europe and the intensifying concern I expect about the company's recent EPS history, we may just get to my downside limit.
Alcatel-Lucent has exaggerated the downslide seen in the iShares S&P Europe 350 Index (IEV), which makes perfect sense given the shares' beta of 2.0. Of course, the beta is generated on a U.S. market performance basis, not on European share movement. Still, we can generalize and say that ALU will exaggerate market moves. ALU is a multinational, but it also is based in Europe and has a significant degree of European business.
Alcatel-Lucent is suffering because of its European exposure and given the latest round of issues to strike the EU. It's more than just the Cypriot banking crisis affecting ALU today, but the crisis is significant as well. The EU's method of coping with Cyprus, where it actually attempted to tax local depositors, demonstrated a less than adequate economic acumen and threatens depositors throughout the region. It raises the prospect of runs on banks and therefore offers significant risk to the regional economy.
Meanwhile, economic activity is currently deteriorating across Europe and infecting linchpin states France and Germany. The European Central Bank (ECB) just reduced its economic forecasts for this year, with a range that stretches from slight contraction to modest growth. On Wednesday, the mess seemed to be piling up further, due to a disappointing Italian bond auction and a report that U.K. banks were not passing their stress tests. Unemployment continues climb across Europe and economic contraction seems highly possible to me across the EU this year. Some like to point to ALU's U.S. business as an offsetting reason to buy the stock, but there remain serious issues that need reconciling in the U.S. between stock market gains and real economic activity. Many of these concerns and others have the shares of Cisco Systems (CSCO) and Ericsson (ERIC) likewise lower recently. Though, I recently suggested Cisco for purchase.
Alcatel-Lucent's recent EPS history and estimate trends are also working against it. The company has badly missed estimates for each of the last four quarters. Estimates for this quarter ending in March have been reduced over the last 90 days from -$0.08 to -$0.11, portending trouble again. All of these factors are red flags for the current quarter. Now that capital flows feeding into equity funds are growing more discriminating, ALU has lost some support. Also, investors who may have taken tax losses last year on ALU and waited the necessary 30 days before retaking stakes have likely done so. The stock's price-to-book may seem compelling at 1.22X, but it is meaningless if book value is declining. Still, I do have a limit at which I would not stay on the short side of the ALU argument, but that is another 11% to the downside from here.