In a sudden change of sentiment, communication infrastructure companies have been on a roll lately. Alcatel-Lucent (ALU) has lead the charge with YTD performance topping 150% returns, followed by Nokia (NOK) and Ciena (CIEN) coming in at 50%, Ericsson (ERIC) at about 30% YTD and Juniper (JNPR) basically flat for the year at about 2%.
The recent Verizon (VZ), Vodafone (VOD) deal will leave Vodafone cash rich and speculation has it that the company will concentrate on upgrading its infrastructure in Europe and emerging markets. China Mobile's 4G LTE upgrade cycle is another infrastructure development that is also in play, and will provide a lot of exposure to capital spending for the whole sector.
Alcatel-Lucent is a turnaround play and there is a lot of positive sentiment for the stock because the market thinks that the new CEO Michel Combes is finally doing something right in the company. At a recent investor conference he emphasized that generating positive cash flow was a very high priority and that in order to achieve this, he might even resort to asset sales. Speculation on the street is that ALU's wireless division might be on sale soon. ALU's recent contract to build a wireless network for Spain's Telefónica (TEF) is also another positive for the stock.
Nokia off the Microsoft (MSFT) acquisition is still climbing and has surpassed the acquisition price. In Nokia's case, it seems that the parts were indeed worth more than the whole, especially now that the balance sheet problems of the company seem to be over with the $7 billion cash infusion from Microsoft (although I will look at the balance sheet closer when all the dust settles).
It also seems that the market is looking at Nokia from a different angle now. Nokia is now primarily a wireless infrastructure and services company. And with all the spending talk going on the European continent, it seems the market is looking at the company very different after the recent devices divestiture to Microsoft. Ericsson being a European company will also stand to benefit from any wave of pan European infrastructure spending.
As for Ciena and Juniper, there is a lot of positive spending commentary coming from all over the place. Ciena has forecasted strong revenue for the current quarter as a recovery in spending by some of its biggest customers is underway. AT&T (T) has said it will boost capital spending by 16% to $22 billion a year for the next three years. Verizon has also reiterated increasing capital spending. Both Ciena and Juniper sell a lot of gear to both companies.
The question is, are these stocks a buy after this infrastructure rally? This is not an easy question to answer, however I do feel that Nokia's rally has been over extended and perhaps investors might want to take some money off the table. In addition, with Fed tapering talk all over the place, there is a big possibility that a good correction might come towards investors' way, especially in ALU and NOK.
However, on a Price/Sales basis, my pick would probably be ALU, since even after the rally its Price/Sales stands at 0.42, where Nokia is around 1.4 (ex. the devices division), Ciena at 1.3, Ericsson 1.3 and Juniper at 2.4 And that's the reason why Juniper has not really rallied, at all - meaning it was fully valued where other stocks were at distressed prices.