At the start of the year, I wrote an article about Alcatel-Lucent (NYSE:ALU) and argued that selling the stock will not be a wise decision. There was a lot of negative sentiment about the stock at that time and the stock did go down for a short period before coming back to the previous levels. The chart below shows the movement in the stock price over the mentioned period.
Instead of selling the stock, I proposed another strategy to safeguard the profits and make some additional profits in case the stock price actually goes down - the strategy involved writing put options and collecting premium (writing put options means the investor has a long-term bullish stance on the stock and wants to collect some shares at a discount). Please read my article mentioned above to get further explanation. I hope some of the investors followed the strategy and made some free money as the suggested options were unlikely to be exercised. The reason behind my positive view was the upcoming earnings announcement, which I believed will surprise the market, and it did.
Now, I will not be going into the earnings announcement as my fellow Seeking Alpha authors have gone into detailed analysis of the earnings; I will only be focusing on the shift plan as I have done in the past. In case of the companies making a turn around, I always analyze the company on the strategy - If the strategy is being implemented properly, I continue to be optimistic - Numbers and metrics become secondary and should only be used to gauge the impact of the strategy and should not be looked at in isolation. Let's see how much progress the company has made over the last few months.
The Shift Plan: Things are Going According to the Plan
It is extremely encouraging when you see a management deliver on its promise, especially in case of a company making a turnaround. Alcatel-Lucent had targeted cost saving in the region of $400 million for the full year - the company reported total fixed costs savings of about $490 million (exchange rate of $1.36 have been applied here). I have mentioned in my previous articles that the company is on its way to meet its cost saving targets due to the ruthless decisions of Michel Combes.
The LGS and Enterprise unit sale will be completed during the next year, which will further result in reduction of costs. Furthermore, an important metric to consider here is the ratio of SG&A (Selling, General and Admin Expenses) to total revenues - the ratio currently stands at 14.1% for the full year revenues, down from 15.7% from the last year. I expect it to further come down due to the sales of these two business units and continued efforts to decrease the costs.
Moving onto the next item on The Shift Plan - cash position of the company has been enhanced over the past few months. The net cash position of the company is around $200 million at the end of the year. ALU has made some astute decisions to refinance the debt and reimburse the short and mid-term maturity debts. Furthermore, rights issue of about $1.35 billion has also helped. Nonetheless, the cash position of the company is looking better and it will be stronger as the cash from LGS and Enterprise units comes in during the next year.
Proposed Sale of Enterprise Unit
In my previous article, I analyzed the sales of LGS and Enterprise units - however, the offer from China Huaxin has changed the scenario to some extent. Instead of the outright sale, the company will continue to have some stake (15%) in the Enterprise unit. In my opinion, the new arrangement will be even more beneficial to the company. The valuation is at almost the same level and the price-to-sales multiple will also remain at almost the same levels (0.35). The acquisition of a business unit by a company in the same business sometimes results in a disaster and the expected synergies are not achieved. However, the acquisition by an equity group brings completely different results. Usually, an equity group buys a business and breaks it up to sell the parts; however, in some cases, the equity groups focus on the business and growth, and sell the business unit at a substantial premium once the business unit has become more profitable.
China Huaxin plans to double the business of the Enterprise unit over the next five years, which will also need some acquisitions. So, it shows that the group is willing to make substantial investment over the next five years. ALU's Enterprise unit is worth about $1 billion at the moment, based on revenues - China Huaxin wants to make it $2 billion business over the next five years. Furthermore, the Enterprise unit employs around 2,800 personals and the company was facing considerable opposition from the labor unions regarding the sales and the lay-offs. The sale to the Chinese group will not result in large lay-offs, which will bode well for the further cost reduction steps of the company.
I remain optimistic about this networking giant and believe the stock will make substantial upwards movement over the next twelve months. This is the year we will see The Shift Plan come into full swing with moderate growth in revenues as the company continues to expand its ultra-high speed internet efforts. The fundamentals of the market as well as the internal strategy of the company are favorable and the stock should not see any major fall in price, barring a stock market crash.