Alcatel-Lucent (ALU) shares enjoyed a surge on the Deutsche Bank upgrade, but the shares have been bleeding since while bearing the weight of the world. In a recovering global marketplace, investors might be willing to bear some risk with a hopeful high-beta turnaround story like ALU, but Alcatel-Lucent cannot bear the weight of today's world.
Without real evidence of company-specific value creation at earnings, Alcatel-Lucent will not likely garner new share price ground. It's because even while stocks have been broadly higher, the sectors benefiting most from capital inflows into equity funds have been defensive in nature. Dividend paying consumer staples like Johnson & Johnson (JNJ) and Procter & Gamble (PG), healthcare ideas and utilities have been the stronger performers. Technology stocks, consumer discretionary shares and cyclical energy names have trailed behind. Even healthier peers of Alcatel like Cisco Systems (CSCO) have had a hard time of it of late, with CSCO shares down fractionally thus far in April against a slighter decline in the SPDR S&P 500 (SPY). The leadership of the market says something about Alcatel-Lucent's near-term future if it does exceed analyst expectations and show some signs of real operational turnaround when it reports earnings in late April.
Earnings estimate trends portend trouble for ALU, with the consensus figure for the March quarter adjusted to a per share loss of $0.11 from a loss of $0.08 just 90 days prior, based on data compiled by Yahoo Finance and its partners. The consensus estimate for the full-year 2013 has come down sharply to a per share loss of $0.13, from a per share loss of $0.07 just 90 days ago. The estimate trend paints a skeptical picture for the company that might be digestible by another sort of market, but what we have today is shifting toward the pessimistic of late.
While the investment community celebrated Europe's escape from its sovereign debt crisis in the second half of last year, this year things seem to be falling apart again. There was Cyprus, and we know the eurozone economic forecast has just been ratcheted lower by the European Central Bank. We understand that Germany is experiencing economic contraction. In Asia, we have a surreal geopolitical mess developing, and in China the government is taking serious steps to put the brakes on real estate development. The nation's suspect growth is not what it used to be, and for good reason considering the issues of the Europeans. Finally, in the U.S., the economic reality is proving to be something different than what the market was expecting earlier this year.
When things seemed rosy and the SPDR S&P 500 was climbing, the 2.2 beta-bearing ALU was climbing higher, but now that the market's outlook is in question, the same name is sinking. Even despite the upgrade by Deutsche Bank and the share price surge that followed, ALU is still down in April and has been heading lower of late. This week's data might have offered some sort of support, but I suspect retail sales and earnings season forewarnings will instead weigh on stocks, especially considering the job shedding seen in retail last month (24,000 jobs shed). That is not good news for the type of story the high-beta hopeful turnaround stock is telling.
While ALU is still above my $1.20 target, it was recently approaching it, having marked $1.27 intraday on April 3rd, the day before the Deutsche Bank upgrade. Given the tone of trading today, the EPS estimate trend of the company and its recent reporting disappointments (at least 4 consecutive EPS misses against estimates), I think it's too much to ask of ALU to bear the weight of today's world. I expect we will hit my target and I would sell the shares into it. It may not seem like much in dollars and cents, but it's 10.4% down to it nonetheless.