The restructuring plan that telecom equipment maker Alcatel-Lucent (ALU) had initiated in June of last year has reaped rich dividends for the company. The stock is up more than 125% since the plan was announced last year and the stock hasn't run out of steam yet as. There are numerous catalysts that could power Alcatel to new highs, such as the LTE roll out in China and woes of rival Cisco Systems (CSCO).
Alcatel was able to slash its net loss almost in half in 2013, while it posted its first quarterly profit since March 2012. CEO Michel Combes aims to make Alcatel cash flow positive and profitable on a sustainable basis by 2015, and the company can certainly achieve this as it is seeing some good adoption of its products in the market.
Alcatel enjoys a string of catalysts. The first of them is the company's leading position in the U.S. market. The absence of Chinese equipment providers from the Chinese market due to security reasons has aided Alcatel's turnaround. The company enjoys higher margins in the U.S. and it is the leading player in the internet protocol and broadband segments.
Alcatel's decision to focus on LTE and small cells is a masterstroke as these are growing segments around the world. Telecom vendors in the U.S. are deploying LTE and also adding small cells to help improve network capacity so that they can serve a larger number of users. Due to this strategy, Alcatel was able to increase its revenue 14% in the U.S. in the previous fiscal year.
Cisco's pain, Alcatel's gain
Alcatel is further helped by Cisco's woes, as the company is finding it hard to sell its equipment in the emerging markets and is also being hurt by product transitions. Cisco is now looking to transform itself into a software and services provider, while on the hardware side, it is looking to focus on data center equipment and security solutions. This has unlocked a massive opportunity for Alcatel to tap into Cisco's market share in the U.S.
Cisco has also reduced its growth forecast for the next three to five years. It expects sales to grow 3%-6% over the coming three-to-five years as against the earlier expectation of 5%-7%. This clearly shows that Cisco is facing difficulty as it moves towards becoming a service provider from hardware. Cisco's latest routers have not gained enough traction as competition from Alcatel has increased. Cisco management accepted the fact that they were late in coming to the market with their latest routers, leading to loss of market share.
However, Cisco is gaining pace in data center hardware and it is imperative for the company to focus on areas where it is seeing strength. Alcatel can use this opportunity and it has already made some progress in this area. Alcatel's Shift Plan has helped it increase sales of its LTE products.
Focus on efficiency
Alcatel has shipped more than 125 million Voice over IP subscriber licenses globally, with the bulk of it being accounted for by Voice over LTE (VoLTE). VolTE helps operators reduce operational costs as it operates on an IP network and reduces spectrum needs, thereby freeing up space for other services such as video conferencing and data, increasing the efficiency of 4G networks. Since Alcatel is providing end to end solutions to customers, it is quite natural for the company to gain more customers. It already has more than 100 service providers across the globe for its 4G solutions and this is a handy advantage.
However, Alcatel is experiencing softness in Europe. Sales in the continent decreased 3% in 2013. But Alcatel might be able to execute a turnaround in this market also. The company's fiber-to-the-home technology has been adopted in Switzerland by Swisscom. Swisscom delivered 1 GB per second access to around one-third of households in Switzerland through Alcatel's Intelligent Services Access Manager, making it the fastest residential broadband service in Switzerland.
With the help of such product development moves, Alcatel can gain its footing back in the European market. But, one of the most lucrative markets for Alcatel nowadays is China, where China Mobile is busy rolling out the world's largest LTE network. China Mobile aims to build 500,000 TD-LTE base stations and 340 major cities in 2014. The total number of base stations in China for TD-LTE is expected to exceed 700,000 this year, covering 3 billion people in the country.
Alcatel has landed the deal for supplying small cells to the telecom giant. Alcatel's Metro Cell solution will enable China Mobile to provide for the increasing demand for data across urban areas in China in an effective and economical manner. This is a big win for Alcatel as China Mobile is expected to incur record capital expenditure this year on LTE deployment.
With such solid tailwinds, it is quite natural for investors to expect big things from Alcatel going forward. Even analysts are quite bullish about Alcatel's prospects since its earnings are expected to grow at a CAGR of a whopping 83% over the next five years. The company's aims of becoming sustainably profitable by 2015 is quite ambitious, and at a forward P/E of just 20, Alcatel doesn't look like a bad investment even after appreciating tremendously over the past few months, making it a good buy even now.