Businesses usually invest in telecommunication solutions. The question though, is this - do most of them choose Alcatel-Lucent's (NYSE: ALU) offerings? The answer is no. For years, the company has been failing to make an impact. This is why you'd only react in one way when someone tells you to invest in the not-so-impressive firm - you'd end up thinking that you've just heard a joke. If you're really smart, then you should know better than to make assumptions and you appreciate the need to pay attention to the most important details. If you'd like to find out why Alcatel-Lucent is still associated with bad investment choices, then just read on.
The State of the Game
It's best to answer one important question right away - how's the company doing so far? Well, it's safe to say that the telecom-equipment manufacturer is in danger. Its 2012 Price-Earnings Ratio, for example, was -8.50. This just means that the corporation lost money throughout the previous year. Since you're finally approaching the topic of Alcatel-Lucent's value with an open mind, you'd begin to wonder whether its competitors managed to achieve much better P/E Ratios in the previous months. Truth be told, Nokia (NYSE: NOK) - which is another company that's finding it difficult to stay relevant - had a much worse 2012.
When compared to the industry P/E average of 8.09, the two firms' ratios become much more troubling. What makes Nokia a tempting pick for investors though, is that it finally managed to capture the attention of consumers worldwide. In particular, it isn't just about IT hardware, but it has a stronger mobile-phone arm. What's even more interesting is that the corporation is currently the leader among those that churn out Windows-fueled devices - HTC is its only real competitor so far. Alcatel-Lucent on the other hand, has no other choice but to stick to telecom products that are catered towards businesses instead of individuals.
A Myriad of Dilemmas
What's wrong with being limited to offering business-oriented products? Simply put, it forces the telecommunications company to go head to head with the likes of Cisco (NASDAQ: CSCO) and Ericsson (NASDAQ: ERIC). While this might only seem normal, you'd have to keep in mind that the latter two boast dominance - having 12-month revenues ($47 billion and $34 billion, respectively) that eclipse that of Alcatel-Lucent's, which is only a little less than $18 billion. After becoming aware of these dilemmas, you'd most likely ponder upon another relevant question - is the company's decline solely due to the challenge of competition?
Unfortunately, the answer is no. The corporation always had to deal with concerns that stem from within. The first few months after Alcatel and Lucent's merger was already filled with problems, since the resulting firm's many branches throughout the world engaged in needless competition (or simply put, quarrels with one another). Aside from this, it seems that the global telecommunications company is being held down by internal politics and a lack of direction, as pointed out by some of its employees. With these in mind, you'd surely begin to believe that Alcatel-Lucent is far beyond repair. Well, the firm's new CEO, Michael Combs, would say otherwise.
All about the Solution
He believes that fixing the firm isn't impossible - all that needs to be done is to roll out a two-part plan, which is mainly about cost-cutting and asset sales. While it's obvious that many investors suddenly showed signs of enthusiasm after learning of the CEO's objectives (which would supposedly translate to a little less than $3 billion in freed-up funds before 2015 ends), those who've been following the corporation for quite some time remained uncertain on whether survival and profitability are both on the horizon. The reason for their skepticism is that Alcatel-Lucent's previous chief executive carried out a similar cost-cutting program.
At present, the company's per-share price is up by roughly 3.00%. As you've discovered, this might not last at all - especially since it's merely been fueled by Michael Combs' announcement. In the simplest sense, if investors fail to see any concrete results in the coming months, then rest assured that the firm's stocks would drop once more. You'd also have to keep in mind that Alcatel-Lucent is linked with innovation (as brought forth by its well-known R&D divisions). When investors realize that "asset sales" translates to limited technologies and fewer breakthroughs, then they'd end up worried and they might begin to sell.
Truly Sane Suggestion
As you've realized so far, Alcatel-Lucent is a problem-filled company that's currently undergoing changes. As you've also discovered, some investors are beginning to believe that the firm might just be able to turn things around, despite having been synonymous with disappointment for quite some time. You shouldn't hastily interpret others' eagerness as a telltale sign of a good investment though. Instead you have to think whether there are much better choices. Overall, given that Cisco and Ericsson have affordable stock prices despite being industry leaders, it's clear that adding Alcatel-Lucent to your portfolio is an unnecessary leap of faith.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.