Alcatel-Lucent (ALU) shares rose 4.2% on Wednesday, but why? There was no corporate press release announcing a great accomplishment. There was no indication of acquirer interest. No activist investor demanded value adding action. Rather, ALU and the market generally rose Wednesday, likely on relatively good economic data out of France and China. The economies of both France and China are important to the company, but I believe the majority of the global economic data reaching the newswire lately has reflected poorly. Thus, I think a hopeful and tangential driver was responsible for the day's gains in stocks and in ALU. The reality of the situation, which should come hard with earnings season and ALU's earnings report, could restore both the market and the stock to their intrinsic values that I suggest are lower than present value.
The SPDR S&P 500 (SPY) climbed 1.2% Wednesday. The SPDR S&P Telecom ETF (XTL) rose 2.2%. Ericsson (ERIC) rose 1.1%, Cisco Systems (CSCO) took 2.4%, and Alcatel-Lucent gained 4.2%! Do you see the trend here? The greater the risk, the higher the return was on Wednesday. Cisco and Alcatel-Lucent are in the same business, but Cisco has a beta coefficient of 1.4 where ALU has a beta of 2.2.
The news that broke was basically good Wednesday, don't get me wrong. I simply believe it was given far too much weight by a greedy market holding too much capital in its pockets. The big driver of the day was the trade data out of China. China reported its March imports increased by 14.1%. Smart money has been hopeful of a middle class growth explosion in China since Nixon opened the door. Today's data seemed to offer some evidence of burgeoning domestic demand for goods and services from hopefully a fast growing Chinese middle class. When it finally happens, China bulls hope it will be a rising tide to lift all ships.
There are just three problems with this latest news. First, we need to ask if we can trust any data that comes out of China. Second, we need to ask if one month is enough to start a party that could last a couple of decades. Finally, we should consider that perhaps temporary issues like pricing for agricultural goods or other imports boosted the number. It happens all the time in monthly economic data, and it is much more probable that this was the issue this month rather than China's middle class finally emerging. And oh by the way, Chinese export growth, which measures demand from the U.S., Europe and the rest of Asia (in other words the world), slowed in March.
There was a second bit of news Wednesday that mattered to markets and to ALU shares also, given the performance and the absence of other news. France reported its industrial output increased 0.7% in February. FYI: it was down by 0.8% in January, so the net for this year is still negative. Secondly, growth mostly came from the transportation sector, in other words, on high ticket items that can swing the number in a big way. Airplane production by EADS (EADSY.PK) subsidiary Airbus probably had something to do with that given Boeing's (BA) recent Dreamliner issues. You'll want to also note that French Industrial Production was still down 2.5% from the year before and that the nation is facing its third recession in four years. There was nothing here to celebrate. Manufacturing output is down 0.3% in the quarter-to-date.
Thus, I suggest stock investors and prospectors in ALU inspect their drivers more carefully before sending good money to work. The broader market and the beta levered Alcatel-Lucent should immediately give back the day's gains, as they were undeserved in my view. The company continues to face a quarterly report in which the consensus of analysts has adjusted its loss per share estimate to -$0.11, from -$0.08 90 days ago. This is not a reason to celebrate, in my view. In fact, I would go as far as to say that the global economic outlook and geopolitical situation (on North Korea and Iran issues) should be weighing on stocks now, and on ALU to a greater extent because of its beta coefficient.