Alcatel-Lucent (ALU) has turned in a discouraging performance in 2014. The stock is down 18% so far this year, even though the company is making solid improvements in its business. A closer look at Alcatel's recent quarterly performance will make it evident why the company looks like an ideal buy on the pullback.
A strong performance
Alcatel, in its first quarter of 2014, reported revenue of $4,061 million, up 0.3% from last year. Revenue was lower than the consensus estimate of $4,354 million. However, the gross margin for the first quarter was 32.3%, up from 28.2% in the prior-year quarter. The company reported an improvement of 200 basis points in the gross margin.
Also, its reported loss was less than consensus estimates. The company reported strong growth in China and Japan with a 19% increase in revenue, year-over-year. However, North America and Europe were down 1% and 2.5%, respectively.
The road ahead
Alcatel is benefiting from its turnaround strategy that it implemented in 2013, known as the Shift plan, to transform itself from being a telecom generalist to a specialist in IP networking and Ultra-Broadband services. The Shift plan will help the company increase its margin and improve its financial outlook as well.
Alcatel is now working on its cost saving and repositioning plan. The company also continues to work on decreasing its costs and sell under-performing and non-profitable assets. Furthermore, the company can use the money to pay off its debts and sustain long-term profitability. Alcatel also is aiming toward shifting its focus from older technologies to newer ones like Internet routing, under which it plans to cut costs by 15%.
Alcatel is now in a partnership with Intel (NASDAQ:INTC) to conduct research in cloud and security technologies, which is beneficial for further expansion of Alcatel. Also, Alcatel's partnership with Qualcomm (NASDAQ:QCOM) to develop multi-mode cells, which will combine Alcatel's light radio access network with Qualcomm's small cell chips, is another driver. These cells are expected to hit the market in mid-2014.
The company also recently partnered with China Mobile (NYSE:CHL) for a year in a contract worth $1 billion to move to an all-IP ultra-broadband network. China Mobile, being the biggest telecom company in the world with a 750 million subscriber base, is a big catalyst for Alcatel. Also, the second largest telecom company in Thailand, DTAC, is dealing with Alcatel-Lucent to upgrade its 3G network to 4G.
So, Alcatel-Lucent, although in a turnaround mode, can be considered a good option for investors due to its partnerships with Qualcomm and Intel.
Although Alcatel has been struggling for the past few months, the company's comeback plan is on track. In an interview last week, Alcatel's CEO, Michel Combes, confirmed that Alcatel will meet its target of disposing €1 billion ($1.36 billion) of non-profitable assets as a part of the Shift Plan. In addition, the company's core router product is also gaining steady pace. Alcatel recorded four wins in the first quarter, landing new clients in the cable sector.
Alcatel-Lucent's deal with NextGen
Last month, Alcatel signed a $100 million deal with Australian communications, cloud and data center company NextGen to build a 2,000-kilometer underwater fiber optics cable between Darwin and Port Hedland. The construction of this undersea cable is expected to be finished by 2016, and will bring in some much-needed revenue growth for the company.
The cable will facilitate high speed data transmission for Inpex's Ichthys liquefied natural gas project and Shell's Prelude floating liquefied natural gas project. This project will undoubtedly help Alcatel gain traction in underwater fiber optic cable technology. Alcatel-Lucent Australia's president and managing director, Sean O'Halloran, said,
"This is another example of a strong telecommunications investment trend in the Australian resources sector. Alcatel-Lucent has for many years worked closely to keep Nextgen at the forefront of the market and this project is another great product of that positive collaborative relationship."
Alcatel is making a number of good moves to improve its business. It has reduced its losses drastically and looks set to generate more business on the back of new contract wins. As a result, investors are advised to take advantage of the stock's weak performance this year by buying more shares.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.