Alcatel-Lucent, Q1 2012 Results Triggered A 16% Decrease In The Share; Could It Be The Right Moment To Buy?

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The French company Alcatel Lucent (ALU) has published its 1Q12 results:

€ (Mil.) 1Q11 2011 1Q12
Revenue 3656 ($4972) 15327 ($19925) 3206 ($4204)
Gross profit 1292 ($1757) 5360 ($6968) 971 ($1273
Gross profit margin (%) 35.3 35.0 30.3
Operating profit -18 ($-24) 117 ($152) -363 ($-476)
Operating margin (%) -0.5 0.8 -11.3
Net income -10 ($-13) 1095 ($1423) 398 ($522)
EPS 0.0 0.48 0.18
FCF margin (%) -5.8 3.5 -5.1

Source: Company's report

Disappointing revenue and margins

1Q revenue reached €3.206 ($4.204) billion, decreasing by 12.3% year over year due to the weakness of investments in telecommunications in Europe and the United States. Moreover gross profit margin fell to 30.3% from 35.3% last year and 34.4% last quarter 2011. Operating margin fell to -11.3% from -0.5% last year. The market expected revenue of €3.3 ($4.3) billion for a gross margin of 34.7% and an operating margin of -9.6%.

Improving net earnings and strengthening balance sheet due to the sale of Genesys and dollar appreciation

Net earnings reached €398 ($522) million due to the sale of Genesys with net earning of €659 ($864) million. Genesys was Alcatel-Lucent's call-center service business and was sold to the PE group Permira for $1.5 billion (without any profit on the sale). Genesys was very cash generative for Alcatel and the sale provided the French company with a very needed funding.

The sale of Genesys and the appreciation of the dollar over the last months allowed Alcatel-Lucent to improve its balance sheet. Equity increased by 22.6% year over year.

Improving cash flows

Free Cash flows reached €-163 ($214) million, still negative but improving by more than €100 millions, which is a very good sign and shows a conservative strategy. Ben Verwaayen declared last Thursday that "today the results show a slow beginning of the year but also improving cash and cost management as well as a good potential for last generation products."


Alcatel-Lucent's main competitors are Ericsson (NASDAQ:ERIC), Huawei, Nokia-Siemens network (NYSE:NOK), ZTE Corporation (OTCPK:ZTCOF) and Cisco Systems (NASDAQ:CSCO).

$ 1Q12 Alcatel Lucent Cisco Systems Nokia-Siemens
Revenue (Mil.) 3206 (€) 11256 7354
Gross profit margin (%) 30.3 61.2 27.6
Operating margin (%) 11.3 21.4 -18.2
EPS 0.18 0.33 -0.25
P/E (Est.) 7.4 (12/12) 10.5 (07/12)


Source: Bloomberg

Risk profile

Cash and Equivalents are stabilizing at €3.483 ($4.566) billion for a total debt of €4.5 ($5.9) billion, which is a slight improvement from YE2011.

Alcatel-Lucent is sadly witnessing the transition form CDMA to LTE in North America. The company had a good position in CDMA, which used to offer good margins. The stake is now to focus on last generation products.

The good position of the French company in emerging markets (34.7% of revenue in 1Q12, compared with 31.1% in 1Q11) could drive the growth over the next years. A slowdown in China would be terrible.

What now?

Ben Verwaayen said that objectives for 2012 remain unchanged. Alcatel-Lucent should focus on North America, China and strengthen its position in Latin America and Japan. According to him, uncertainty remains very high in Europe (-22% in revenue year over year). Be that as it may, the French company will maintain a strong financial discipline over the next months waiting for more visibility.

In 2011, Alcatel-Lucent announced positive profits for the first time since the merger after four years of accumulated losses accounting for €9.7 billion. The French company was able to save money on R&D and purchases. Salaries don't rise anymore and almost 2000 people could be laid off in the next months in Europe.

Finally, Alcatel-Lucent should not build provisions for U.S. pensions until 2014, which should improve its financial structure.

When I talk to some people I know who work for Alcatel-Lucent, they tell me that the company looks better managed. Business trips between Europe and the U.S. started again recently after various months of inactivity.

Is it the time to buy Alcatel-Lucent?

Alcatel-Lucent is looking very cheap right now, the stock being down by 14% on Thursday at €1.20 ($1.56). It accounts for a P/E of 6.7. The CAC40 average P/E for the first quarter is 11.6. At the time of the merger in 2006, the market capitalization for the new group was €30 billion and the company's market cap is only €2.8 billion now. Moreover the stock decreased by 71.6% year over year, which looks exaggerated.

Regarding the more conservative financial strategy along with the major reorganizations that Alcatel Lucent is undergoing, objectives for 2012 being unchanged, the French company looks undervalued.

I personally think that the situation should not deteriorate anymore with Alcatel already trading below book value.

(Click to enlarge)

Source: Yahoo Finance

Disclosure: I am long ALU.

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