Alcatel-Lucent Panic Selling Offers Opportunity For Rational Investors

Jan.25.12 | About: Nokia Corporation (NOK)

Today, speculators and long-term investors who believe in an Alcatel-Lucent (ALU) turnaround story will have the opportunity to pick up more Alcatel-Lucent stock on the cheap as weaker traders get flushed out of the market due to irrational selling based on LM Ericsson's (NASDAQ:ERIC) negative earnings report.

Ericsson reported a 66% drop in profits, attributing much of the drop to a fall off in U.S. network sales to AT&T (NYSE:T), which halted infrastructure roll-outs while it played a losing game of chess with federal regulators over the proposed ATT/T-Mobile merger. The ATT drop off appears to be the only real surprise to Ericsson. However, this simply means more business in the future when ATT refocuses on internal build-out rather than M & A activity. The world has not come to end.

In fact, Ericsson in my opinion is doing exactly what is needed to become a more efficient enterprise in the face of economic uncertainty. According to the 4th-quarter earnings report, it is cutting costs and increasing spending in research and development.

Total operating expenses amounted to SEK 15.6 (15.2) b. in the quarter. R&D expenses amounted to SEK 8.7 (8.3) b., an increase of 6% year-over-year. Selling and general administrative expenses (SG&A) amounted to SEK 6.8 (6.9) b., representing 10.7% of sales compared to 11.0% in the last quarter 2010. Other operating income and expenses amounted to SEK 0.4 (0.6) b. in the quarter.

In 2011, total operating expenses amounted to SEK 59.3 (55.2) b. R&D expenses amounted to SEK 32.6 (29.9) b., an increase of 9% year-over-year. The increase is a result of earlier communicated planned higher investments in radio, such as TD-LTE and IP as well as the acquired LG-Ericsson operations. SG&A amounted to SEK 26.7 (25.3) b., representing 11.8% of sales compared to 12.4% in 2010. Other operating income and expenses decreased to SEK 1.3 (2.0) b. in 2011.

In an article entitled "Ericcson in a Chinese Squeeze - Beware the Swedish Hockey Stick," Forbes contributer Tero Kuittinen claims the margin squeeze in Android phones by the Chinese is also happening in infrastructure:

"Ericsson's network numbers probably demonstrate how the same thing is happening in infrastructure."

I don't know about you, but I don't make trading decisions based on "probably." Chinese equipment maker Huawei is not exactly known for delivering high-quality products, and in the United States, it is unlikely to become a major player due to national security issues (pdf). Huawei is also being accused of intellectual property theft, something that the U.S. and Europe will be taking more seriously in the near future.

That being said, collateral damage from Ericsson's earnings report will manifest today in downward pressure on share prices of other telecom equipment stocks. Alcatel-Lucent is one of them. And for savvy speculators, this will present significant opportunity to buy into Lucent on the cheap after the irrational selling ends. ACLU was down over 10% in pre-market this morning, and may go lower due to panicking investors. But guess what? Lucent will not go belly-up on this news, as the world-wide slowdown is already baked in to its share-price.

Buying in to Alcatel-Lucent on panic selling has proven to be a profitable endeavor over the past several months for those willing to bear the risks, check their greed and execute. From a strategy standpoint, speculators may wish to consider deploying a percentage of their ridiculous profits from trading ALU on the homerun days to steadily building up a long- term position for the future that basically involves little skin in the game. If Lucent goes belly up, they would not get hurt. If it eventually turns around, they will hit a home-run.

Disclosure: I am long ALU.

Disclaimer: ALU is a highly speculative investment as is any stock under $5 per share. Keep in mind that Alcatel-Lucent will not call you and I a day in advance to warn us should they decide to go belly-up.