“Our overlap analysis suggests Alcatel-Lucent’s new management team can deliver greater than targeted cost synergies much more quickly than investors anticipate,” Boddy wrote in a research note this morning. “We also believe that execution risks are not necessarily as high as most investors fear - both Alcatel and Lucent management teams have a solid track record of cost reduction.”
Boddy does say that the new company, “while stronger than the constituent parts,” has a “dull business outlook,” with “limited top-line growth,” and “fierce pricing pressure eroding underlyingn gross margins by” abotu 140 basis points a year.
Boddy adds that fourth quarter results, when reported in February, “will be confusing,” given the November 30 closing date of the deal, and that “revenue weakness will continue” into the first half of 2007, “given the distractions created by the merger process.” Nonetheless, he expects “early evidence of strong execution on cost reduction combined with rising hopes for re-acceleration in wireless growth to drive EPS upgrades, propelling the stock towards our price target (of $16.16) over the next 12 months.”
Alcatel-Lucent shares today have gained 35 cents to $13.62, a gain of 2.64%.
ALU 1-yr chart: