Heading into Alcatel-Lucent's (ALU) first quarter report for 2013, scheduled for this Friday, some troubling signs are emerging about European deterioration. Shareholders will argue that these issues are already understood and priced into the stock. However, a disappointment due to a still deteriorating European market could cost Alcatel-Lucent shares further, in this author's view.
Multinational corporation, General Electric (GE), reported results late last week, leading your author here to pen, Why I Would Sell GE. While analyzing GE's conference call and webcast presentation, I noted an issue of concern for Alcatel-Lucent as well. One of GE's most important trouble spots was its European regional operations, where it said business was worse than expected. Considering that Alcatel-Lucent generates about 26% of its sales from the apparently still deteriorating European continent, the information is very relevant.
We can comfortably state that Europe is still deteriorating based on both the macroeconomic evidence and on anecdotal evidence provided by multinational companies like GE and Caterpillar (CAT) lately. First of all, the European Central Bank (ECB), at its last monetary policy meeting, reduced its own GDP forecasts for the region. The ECB now sees economic contraction ranging from -0.9% to -0.1% for 2013. Caterpillar expressed concern about Europe, stating in its earnings press release Monday, "We believe that economic policies in the Eurozone have not changed enough to address record high unemployment, a 20-year low in construction and over a year of declining output. We expect the Eurozone economy will decline close to 0.5 percent this year." GE confirmed that things are worse than expected in Europe when it reported last Friday that its European industrial segment revenues were down 17% in its first quarter.
Industry peer Cisco Systems (CSCO) does not report its quarter until mid-May, so we will not have business specific information from it in time for ALU's report. However, Ericsson (ERIC) reports results this Wednesday April 24, 2013, and will offer insight useful for Alcatel-Lucent holders. I expect that information to be pessimistic in nature and detrimental to ALU shareholders.
In past articles, I've noted my view that Alcatel-Lucent Cannot Bear the Weight of Today's World, because its beta coefficient of 2.2 indicates it will exaggerate market decline on economic contraction, which is exactly what I see occurring. Data point after data point has added to the evidence of deteriorating global and developing U.S. economic sluggishness. Given the evidence coming in about Europe now, both anecdotally in the corporate earnings reports of multinationals and via macroeconomic data about the euro zone economy, it would seem the probability of a troubled report from Alcatel-Lucent is increased. Likely on similar concerns, analysts have adjusted their earnings estimates for the company from a loss of $0.08 just over 90 days ago, to a loss of $0.11 as of today at the consensus; but perhaps that is not enough given the latest information. While I understand the hopes of value investors seeking a turnaround story with the exceptional returns that tend to accompany them, I see no reason to expect a payoff this month. As a result, I would continue to rate ALU shares a sell, and seek value elsewhere for now.