As some of you may know by now, Alcatel-Lucent (ALU) had a horrible 1Q 2012 report, posting a much wider 1Q loss than expected. Its high point in the last 30 days was 1.98 and from there it fell to 1.44. With this drop, I have to explore this question: Does this sudden down fall make Alcatel-Lucent a good buy right now?
Analysts' Giving Up on this Company?
RBC Capital appears to be very dismayed with the company. It recently down graded Alcatel from sector perform to under perform. This may not be the worse of RBC's statements. Alcatel's 12-month ROA was a dismal 1.7% as it burned through a lot of cash recently. RBC lowered the company's price target to $1.00 from $2.50. Ouch! It does not have a lot of confidence in the company's comeback.
Being in the telecom gear business, one of Alcatel's explanations for the shortfall was an industry wide component shortage that had an affect upon its industry but others also. In general components like transistors and chips were hard to come by. Alcatel's shares plunged over 11% at this announcement as several analysts called the quarter weak and very disappointing. Does this mean analysts just weren't buying it? The stock has not moved back up yet. Are they giving up on Alcatel-Lucent?
In Defense of Alcatel-Lucent
There is a shortage in the components they need. Alcatel-Lucent's larger rival Ericsson (ERIC) said that its first-quarter sales, which were down 9%, were affected by component supply problems. European rivals Ericsson and Nokia-Seimens Networks both posted 9% lower first-quarter revenue. So, it is not like this company was the only one affected by the shortage. Even chip vendor Qualcomm Inc (QCOM) acknowledged Wednesday that it was turning to other foundry suppliers amid a shortage of 28-nm capacity at its longtime foundry partner, Taiwan Semiconductor Manufacturing. Qualcomm could not secure enough 28-nm capacity to meet the increasing demand for its 28-nm parts and that the constraints to supply are expected to limit Qualcomm's revenue potential this year. So there really is a problem.
Maybe Analysts are just Stepping Aside in 2012
There is a telecom equipment recovery under way in the United States but with a number of other industries recovering at the same time like the auto industry, chips and transistors are harder to come by. Thus the company is having a hard time benefiting. The shortage was expected to abate in the coming quarters according to analysts. Is this the key to long-term growth? Should we expect a rebound? We are still going to have a struggle here in the United States-- AT&T (T) said in April that some equipment makers had not been able to make deliveries because of shortages. In Europe it is even worse.
Less than spectacular sales by Europe's telecom gear vendors reveals that there is not a lot of hope for a quick recovery. Many analysts are forecasting meager growth in the telecom gear market this year as big operators such as Telefonica (TEF) and France Telecom (OTCQB:FNCTF) remain reluctant to spend heavily on networks. And who blames them with the constant struggles and problems that exist in Europe right now? Will this be something that has a great affect upon Alcatel?
Going back to the original question: "Does this sudden down fall make Alcatel-Lucent a good buy right now? " Since recovery is expected to be meager in 2012 because of two main problems - shortage of components and European market uncertainty, it makes it hard to think we can expect much of a turn around soon. What if we look to Asia as the savior of revenue? Will that work?
The problems facing Asia right now are fierce price wars as Chinese vendors such as Huawei and ZTE Corp are increasingly winning contracts regionally and globally. Only China's telecom gear vendors are prospering in this environment as they aggressively seek to expand market share. It all boils down to cost cutting right now and how much lower ALU can go after the latest experience. Maybe the current price isn't such a bargain. This does not mean that the company is down and that it cannot recover. If some of the analysts' forecasts are true, ALU will continue to slide farther before it turns around. But they are innovative and outside of a takeover, the stock may rebound next year sometime.