No one can be blamed for fearing or even short selling Alcatel-Lucent (ALU), as the stock rallied incredibly late last year and then tanked to lows that it still hasn't recovered from. The not-so-surprising result is that the company is now outperforming analyst expectations and short sellers are flocking to collect on a strong earnings report, but without much backing that kind of move. Last year, Alcatel-Lucent spiked at over $6.50 per share. Today, you can buy for just about $2.25 per share. And rumors of a takeover will probably tempt investors and turn this lull around.
For many investors, telecommunications equipment probably sounds like a great place to put some cash. As it is, the market is growing in leaps and bounds, and with clients like AT&T (T) and Verizon (VZ), Alcatel-Lucent is poised to do well, as long as it continues to innovate. It has dominated the wireless and DSL market and is now investing in 3G wireless technology, which could go either way with the introduction of 4G technology recently. The stock is trading so low these days that the company makes a very good takeover candidate, although no one has officially come forward to take advantage of this particular bargain.
Even if rumors of an Alcatel-Lucent takeover are a bit over-stated today, this year could be a good one for the company and for investors. One of the biggest factors in last year's peak and subsequent free fall is the high fixed costs of the Alcatel-Lucent structure. When investments in infrastructure were expected to increase last year, Alcatel-Lucent benefited. But when the revenue streams seemed to dry up, there was nothing companies with high fixed costs could do to manage the imbalance.
The reaction at Alcatel-Lucent was to change management and address the risky position it was in. By changing its model, the company has reduced its fixed costs and is in a better position to ride out market fluctuations. Restructuring efforts are starting to pay off, as the company managed annual profit last year for the first time since the merger between Alcatel and Lucent back in 2006. Additionally, clients AT&T and Verizon have said they are going to increase infrastructure spending in 2012. This news made me want to buy Alcatel-Lucent right now.
Alcatel-Lucent is based in France, and while many investors have been fearful of a European meltdown, the markets seem to be weathering what has turned out to be a minor tropical storm, rather than a full hurricane. There have been plenty of European stocks that have done quite well, despite the overall low of last fall. Investors that are afraid of Europe have been missing out by being panicked, rather than savvy.
In the end, European stocks are not being outdone by even some of the excitement in the U.S. and investors who stay ahead of this particular trend will probably benefit when the rest of the investing community realizes that there's nothing to be feared from Europe. Maybe this is one reason why analysts have been underestimating Alcatel-Lucent, and can only watch as the good news numbers roll in, like the above expectation earnings per share and increase in net margins.
Competition in top-tier markets is tight
Alcatel-Lucent investors should watch competitors closely, because not all is well in the telecommunications infrastructure world. WiMAX 4G technology was a threat that seems to no longer loom, with the recent announcement from Sprint that it will not roll out any additional WiMAX devices, but will go 4G with LTE. But Sprint is not the only 4G threat to the 3G investment Alcatel-Lucent has made. Qualcomm (QCOM) presents the biggest competition to Alcatel-Lucent with its LTE 4G chipset and huge market share. Sequans Communications (SQNS) is also pushing to be out front in the 4G market, and AT&T and Verizon are all set to push LTE networks.
Then again, 3G is still much more widely available, and neither Nokia (NOK) or Sony-Ericsson have been able to compete very deeply in the 3G market so far. 3G wireless technology represents about 30% of total revenues. Wireline operations represent over 36% of revenue, and the company also offers a broadband product that is widely available and very popular as consumers continue to increase their activities - getting cable, a high speed internet connection, and VoIP all at once takes serious connectivity. This technology is what has AT&T and Verizon coming back again and again for Alcatel-Lucent products.
Cisco Systems (CSCO) is the major competitor in the broadband field, and with the announcement of the purchase of ClearAccess, Cisco is looking more competitive all the time. If Cisco can make routers attractive again, Alcatel-Lucent risks losing market share to a cheaper and simpler technology installation process. The tech market for telecommunications equipment is not simple and straightforward. As deals are brokered, a new leader could emerge. But the bottom line at Alcatel-Lucent still puts the company in a position to do well over the coming year, no matter what the competition has up its sleeve.
Balanced and Cheap
Alcatel-Lucent has one major benefit going for it that its competitors cannot claim. Right now, you can buy Alcatel-Lucent stock at a considerably lower price than the projected value. I think this stock is going to double in the next six months, and possibly even triple on the year.
Alcatel-Lucent has a balanced strategy that mixes wireless and wireline operations relatively evenly, putting it in the position to finally absorb the volatility of the market it is in. I am betting that Alcatel-Lucent has learned its lesson and is now making the changes that will put the company out in front. And at $2.25 per share the great news is you can't really go wrong as long as you can be patient.
Analysts agree that the stock price of Alcatel-Lucent is very unlikely to drop below $2 in the near future, and those of us who agree that things are getting better are seeing some very exciting potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.