Should You Buy These Outperforming Communication Equipment Companies?

 |  Includes: LXK, NOK, VSAT
by: Equity Bytes

Communication equipment companies have given strong returns year to date. ViaSat (NASDAQ:VSAT) and Lexmark (NYSE:LXK) are both up ~73%, while Alcatel-Lucent (ALU) is up 82%. ViaSat has posted strong quarterly results and its product pipeline remains strong. Alcatel-Lucent has been struggling to generate sufficient cash flow, but with a change in management I expect to see improvement in operations. Lexmark's core business has been in decline and its software business has increased. In this article, I will discuss these three companies in detail.

Strong Product Pipeline and Revival in Commercial Services Will Drive Future Growth

ViaSat's stock has doubled in the last one year on the back of the growth strategy announced by the company. The company reported strong first-quarter results with revenue of $321 million and EBITDA of $53 million. The growth potential for the company looks strong, and I anticipate that the stock will gain further. So this is a good stock to go long given its future growth potential.

The company's satellite service is doing good business. The management announced its plans to launch the latest ViaSat-2. The company has a contract from Boeing (NYSE:BA) for ViaSat-2. I expect that the revenue from ViaSat-2 will start from 2016. If we assume the EBITDA from ViaSat-2 based on the success of ViaSat-1 to be around $200 million, then the NPV from this will be ~$20/share. Given the costs associated with the development of ViaSat-2 of ~625 million, it comes around $10/sh. So the return will be ~$10/sh.

The commercial services of the company are finally picking up. The commercial services revenue was up by 28% YoY. I expect that this segment will show robust growth in the coming quarter. The company is currently trading at price/sales value of 2.66 and its forward P/E of 31.04. The company looks undervalued at these multiples considering its future growth potential. So I am bullish on this stock.

Improvement in the Operating Cash Flow and New Products Development Will Revive This Company's Fortunes

Alcatel-Lucent's stock has almost doubled year to date. The company's second-quarter results were better than the consensus estimates. The revenue and EBITDA margin of $4.72 billion and 31.9%, respectively, were above the consensus estimate of $4.49 billion and 30.1%, respectively. The company's free cash flow is stubbornly negative mainly due to negative change in working capital. But in the short tenure of CEO Michel Combe, the results have been encouraging.

The company has entered into a strategic partnership with Qualcomm to develop small cells for ultra-broadband wireless. This type of strategy will help in product development and also shows that the management is taking action to revitalize the company. In the recent-quarter results there was an indication that the operating cash flow is improving. I expect that it will show signs of improvement in the coming quarter as operating losses will be contained and strict cash flow management is in place.

Another catalyst that can work in favor of the company is the improvement in the economic conditions in the Euro region. This will help the company increase its revenue in that region, which will help lower its debt, thereby improving the debt/EBITDA. The company is currently trading at a price/sales value of 0.26 and its EV/EBITDA is 5.98. On this parameter the company's stock looks undervalued. I expect at least 50% upward movement in this stock in the next few months. Therefore, I am bullish on this stock.

Loss in Hardware Revenue Will Bleed the Company's Revenue and Margin

Lexmark reported strong second-quarter results, beating the consensus estimates. The company reported revenue and EPS of $890 million and $0.95, respectively, against the consensus estimate of $859 million and $0.88, respectively. The company has also raised its estimates for the September-ending quarter.

The company has reported booking of a major deal in software and its licensing revenue doubled over the previous quarter. The company's inkjet revenue has shown a decline. So I believe that it will be hard for the revenue from software to offset the decline in inkjet.

The company has launched a new product line, but hardware is facing pressure. Revenue from laser printers was down by 9% due to aggressive pricing in EMEA. The other worrying factor for the company is that DSO has increased, which indicates that the company is trying to sell off its printers and get rid of its inventory. Overall, despite the increase in its software revenue the hardware revenue has struggled to keep the momentum, which is the company's core business. So I am bearish on this stock.

The company is currently trading at price/sales value of 0.68 and its forward P/E of 10.66. The forward P/E looks high given the growth story of the company. So I am neutral on this stock.


VSAT looks to be the most attractive stock as the fundamentals of the company are intact. Given the project's pipeline and better future prospects, I believe that this stock should perform better in the coming months and years. ALU's story has not been good in the past, but new management is thinking out of the box for the revival of the company. The company has entered into a partnership that will help it in new product development. Also, the improved economic conditions in Europe will act as a catalyst for the company. So it's a good stock to have at its current price. LXK will struggle to keep its hardware revenue from falling. Although revenue from the software business has improved, its core business has shown decline. So I am neutral on this stock.

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.