Alcatel-Lucent SA (ALU) seems to be enjoying the premium investors are putting on it as it rejoins the CAC 40 index, closing at $4.51 per share compared to $1.32 per share a year ago. The 241.67% increase in share price for the leading provider in networking and communications technology in Europe is not only driven by the index, but also by some excellent results being presented by the company in the past months.
Doing Great on the Legwork
In a highly competitive communications equipment industry, ALU acknowledges that on top of delivering innovative solutions, the company has to deliver strong fundamentals for its investors. The company reported a year-on-year increase in revenue of 7%, with gross margin improving by as much as 5%. With these figures, operating income has increased by more Euro 300 million compared to last year's results. The company has also been aggressive in its fixed cost savings initiatives, with a year-to-date savings amounting to Euro 259 million as of October. While Q3 2013 still resulted to a Euro 200 million net loss, investors do not seem to mind as stock price continue to go up.
The Value of the Shift Plan
The continuing increase in share price, despite not-so-good net income results, may have driven the Shift Plan, a strategic move kicked-off by the company in June of this year. The increase in revenue contribution of the IP Routing, Terrestrial optics and Ultra-Broadband segments supports the company's 3-year plan to reposition itself from being a generalist provider in the communications equipment industry to a specialist offering products and services in the IP networking and Ultra-Broadband Access. This is a strong drive by the company to utilize its core competencies, especially Research and Development, in segments which are expected to be inevitable in high-performance networks of the future. The decision to do self-funding with this refocusing project also reflects the company's confidence that it can deliver its vision.
With more resources being reinvested on focus segments, Core Networking is expected to generate more than Euro 7 billion in revenues. The company is also set to enjoy double-digit operating margin from 4.25% during Sept 2013 to as much as 12.5% in 2015. The sale of non-core businesses is also expected to gain the company additional cash flow while continuing its projects in fixed cost reduction. The company is sitting in over 30,000 patents which are also being mobilized to generate solid revenue stream.
Continuing the Winning Culture
With its strong fundamentals and a key decision to refocus its resources in Core Networking, the company garnered more contracts from different regions including Europe, US, and China. Its key wins include a deal with Telefonica (TEF) which gave ALU the opportunity to support the largest part of its 4G LTE network in Spain. In North America, ALU is pioneering the use of TDD-LTE technology through partnership with the company Sprint (S). After winning a TD-LTE license with rivals China Telecom (CHA) and China Unicom (CHU) last week, ALU had another recent win with China Mobile's (CHL) small cells deal. The small cells deal, also called Metro cells, are said to be an important component of the modern mobile broadband network as it broadens network coverage and capacity. China Mobile, the company which issued the TD-LTE license, has over 750 million subscribers and the contract which it issued to selected vendors is estimated to be worth around 20 billion yuan. Getting 11% share on the TD-LTE deal is consistent with both ALU's strategic and operational targets. Excellent delivery of these contracts will ensure larger deals and higher profitability in the future.
As an investor, stability and potential are key elements which are important for a buy-in. Undeniably, Alcatel-Lucent SA has built a strong name in the R&D department which means that the decision to refocus will further realize its potential in the area of information technology. On the other hand, the re-inclusion of the company in the CAC 40 index is a good sign that it has significant market capitalization and liquidity to support its goals.