Relatively new Chief Executive Officer's Michel Combes belted out all the right phrases to shareholders who might prefer burning Alcatel-Lucent's management at the stake, but won't publicly admit it. Even though his predecessor could not turn the company around, he told the shareholders that addressing major issues like "burning through cash" and "keeping focus on fewer businesses" are among the company's top priorities. Okay, so we have heard this all before, what's different about this Pied Piper?
Comparing ALU to Ericsson AB (ERIC), Mr. Combes shared the story of how Ericsson had trouble treading water 10 years ago just like ALU is now. At that time, the company focused on mobile equipment but had to cut more than 50,000 jobs -- half of its workforce. This took place over a four-year period as debt-ridden phone carriers started to cut back on spending. At the same time, new competitive rivals from Asia popped up. Today Ericsson is the world's largest vendor of wireless networks.
This was a smart move by Mr. Combes, tying ALU's lengthy struggle into a similar struggle by the Swedish company who came out way ahead in the end. He painted the picture that Alcatel-Lucent will divest and use other partnerships to help curb losses. He basically said: "They did it; we could follow in a similar trajectory!" This was a smart speech and there was nothing else he could say or no other road to take except find a past similar failure that came out on top and say we can emulate this company and become winners just like them. Ericsson has had nine straight profitable years as sales have gotten better. The value of the stock has risen five fold since its low points in the early 2000's.
Evidently, this speech worked as shares recently jumped by almost 10% which is the biggest gain in a month for the company. This took place even though the company did report its fourth straight quarterly loss as the so-called mountains of cash have now become rolling hills of pocket change. Moody Investors Service is contemplating cutting the company's debt rating into junk unless ALU can show a profit the second half of the year and stop going through cash like it has. Presently, ALU has a rating of B3 which is considered the sixth highest noninvestment grade. In order for the company to preserve this rating it must improve its results the last half of this year; the first quarter's negative operating margin of 5.5% will not cut it. The company must reach an operating margin of about 5% by the end of the year without burning through $500 million. There is a high probability that the company will be downgraded if it does not achieve these marks.
Everyone, including Mr. Combes, knows that the company cannot sustain its present direction in the long run. In February, Mr. Combes took the reigns as CEO and is presently putting the final touches on his reorganization vision which he hopes to unveil to shareholders by midsummer. One hint that he gave in the general speech was that the company cannot remain what he calls a "telecom generalist" but needs to evolve into a multi-specialist. What that means has yet to be seen.
Mr. Combes mentioned the idea of needing to focus on fewer businesses. IAE Research recently wrote an article here on Seeking Alpha and described the broad diverse business segments that ALU is into and how it has been a major source of cost. I would encourage everyone interested in investing in ALU to read this article. This is what was written:
"Alcatel-Lucent is massively diversified in terms of its product portfolio, broadly categorized into network segment (IP and Optics), Wireline (Broadband), Wireless (CDMA), software services and solution segment solutions and Enterprise segment. Although, theoretically, diversification is an optimal strategy, but it has been a major source of costs for the company so far."
Keeping all this in mind, I ask myself this question: "What advice would I give to those who are interested in looking at Alcatel-Lucent as an investment right now?"
I am not a fan of putting money into ALU at this point in time. I believe it's important to wait for Mr. Combes to share how he intends to bring the company back to profitability, and this speech won't take place until mid-July. At this point, a new investor should assess the probability of success based upon what he or she hears. This is a start.
I am sure we are going to hear some general information that we would expect like the company focusing on its most profitable areas of business and getting rid of the areas that are least profitable/unprofitable. This is just common sense, it doesn't take a rocket scientist to figure out that's where things need to start. I would also expect the company to focus more in its biggest profitable market which is the United States.
I have heard advice given that investors should just wait and see what happens. But I would encourage a would-be investor to go a step farther. Focusing on profitable areas and spending more energies on the US market because that is its biggest and most profitable market should be a given in the upcoming speech this summer. Outside of that, I would listen to what Mr. Combes is going to say and then do further research on his talking points and evaluate whether or not you believe the company is capable of fulfilling his vision. Either way, this is a long road. The phrase "this is a long road" must have been written hundreds of times over the last couple years by authors like me. But it has a new meaning today. The "long road" won't even start until after Mr. Combes' speech and you, as the investor, must assess whether the new direction of the company will take it to profitability or not. This will help you define whether or not ALU will be a good long-term investment for you.