One of the great frustrations of evaluating stocks for investment is finding a company that seems to have all the tools to be a great success, but never achieves its perceived potential. Alcatel-Lucent (ALU) is one such company. Since the 2006 merger of France's Alcatel and AT&T (T) spinoff Lucent Technologies, the company has provided good jobs for lots of engineers but hasn't done much to reward shareholders.
This story goes back to the merger announcement in November 2006. Here are a couple of bits of information from the announcement: "Pro-forma annual revenue of €18.6 billion" and ". . . generate pre-tax annual cost synergies of approximately €1.4 billion within three years." Going back to the 2006 pro-forma results, reported annual revenue was €18.25 billion, gross profit was €6.25 billion, and sales and general administrative expenses (SG&A) were €3.45 billion. Jumping ahead to 2011, for the year reported revenue was €15.66 billion, gross profit was €5.36 billion, and SG&A expenses totaled $2.67 billion. Over the past five years, Alcatel-Lucent managed to lose €2.6 billion in sales, but general expenses were only reduced by €780 million -- half the stated goal. The €2.37 billion spent on research & development is about €300 less than the amount spent in 2007.
For 2012, the downward trend in sales is expected to continue. The Wall Street consensus forecast predicts a 4.5% -- in dollar terms -- decline in revenue and a consensus earnings per share of 28 cents, down from 47 cents of adjusted earnings per share in 2011.
Alcatel-Lucent has reported negative free cash flow of at least €450 million for each of the last three years. There is a possibility the company will be cash flow positive in 2012. It has sold its Genesys call center unit for about €1.1 billion, which will boost cash in the bank. On the flip side, the sale will reduce annual operating profits by €100 million.
Considering the low share price and market value at which Alcatel-Lucent trades, shareholders may see some nice, short-term price pops on positive earnings reports. The value of the company's patents and technical expertise put a floor on its market value, probably close to the current market capitalization. As a long-term holding, the company has demonstrated for half a decade an inability to increase revenue and profits in a tech environment where use of its products and services has expanded dramatically. Investors looking for long-term multibagger gains from Alcatel-Lucent will be disappointed.