Alcatel-Lucent (ALU) has had a very rough couple years. It went from a dividend paying company with a stock price of about $14 in 2007 to a company that pays no dividends and has a stock price between $1 and $2 currently. More than most companies, Alcatel-Lucent's success depends on the success of the overall economy. It tends to do extraordinary in boom times but very poorly in hard times. More than ever Alcatel-Lucent needs the economy to grow, and quickly.
On the plus side, Alcatel-Lucent can hardly go much lower. Out of a group of economist surveyed, the lowest estimate of its stock is $1.00. Most analysts estimate its stock will increase to about $2, which is hardly much at all. But at this point, growth is growth and any increase is a good sign. In fact, a price of $2 is enough for Deutsche Bank (DB) to upgrade its outlook to a 'buy', claiming that the markets have been overly harsh on Alcatel-Lucent.
Deutsche Bank is not the only one who believes that Alcatel-Lucent has potential. With the extension of 40 gigabit Ethernet throughout its Mesh data center, Alcatel-Lucent has drastically increased the speed of the network. One of the major benefits of this increase is the ability to support virtual desktop, cloud services and video collaboration. This is a move toward a brighter future, as these features are growing in popularity across the world.
This upgrade further means that Alcatel-Lucent is now Citrix Ready (verified), which is a program that helps customers connect with third-party networking and cloud computing from Citrix (CTXS). With Citrix's strong outlook and expansion of virtual desktop technology, aligning with Citrix could be the spark Alcatel-Lucent needs.
The other positive announcement of the week is its new contract with Pacific Island Tongo. With this, Alcatel-Lucent will create an underwater cable linking Fiji and Tongo to bring Tongo residents broadband. A broad band network will be huge for the residents of Tongo, but it will only be a quick source of revenue for Alcatel-Lucent, not a revenue stream. On the bright side, it is good to see Alcatel-Lucent get a contract at all.
Taking the long term approach, the Motley Fool reported that Alcatel-Lucent increased its return on equity about 29%, from -19% to 10%. While 10% is certainly not great, a 29% increase is encouraging. Also, a return on equity of 10% is similar to returns posted by other firms in the industry. Nobody claimed that the networking equipment and telecommunications industry posted high margins.
While there is some optimism about Alcatel-Lucent, there is still pessimism.
Recently, Professor A. Michael Noll of University of Southern California wrote that Alcatel-Lucent's problems began when French company Alcatel acquired American company Lucent. According to Noll, Lucent was acquired because of Bell Labs, regardless of the fact Bell Labs had ceased to innovate sometime before. He sees Alcatel-Lucent to be in continuous decline because it neither innovates nor is a low-cost provider.
Even though Alcatel-Lucent has had a rough patch, its competitors have not been able to truly pull away from it.
Cisco Systems (CSCO) has had the best success over the same period that Alcatel-Lucent has done poorly. Much of this can be credited to Cisco's deep coffers and readiness to acquire new companies. Even so, yesterday Cisco's stock dropped over 10% on disappointing forecast due to what it claims are company fears about Europe affecting the economy. Paul Otellini, CEO of Intel (INTC), wasted little time, announcing today that demand for its products have been untouched by fears of Europe.
Other competitor Juniper Networks (JNPR) has been similarly affected by low consumer demand. The same cautiousness that was reported by Cisco caused Juniper Networks' stock to drop over 5%. In fact, Juniper Networks CEO stated that demand is "unsettled" and that closing deals have been taking longer for the company.
Another competitor, Windstream (WIN) just recently reported its first quarter earnings, and came in well below the expectations of analysts. Moreover, the stock's standing took a hit as it sailed into the "oversold" category and has lessened its appeal. The appeal had been warranted before, as the company reported success in its acquisition of PAETEC and other growth. The question remains whether Windstream can stay strong, or start to show signs of slowing like other competitors.
The real question is does the decline in these companies signal a change in the economy? And if so, why was Alcatel-Lucent seemingly unaffected?
MarketWatch reported that some analysts view the drop in demand for Cisco as a "canary in the coal mine". Needless to say, this would be a major problem. This was made worse by a large drop among many different tech companies. I would not be too alarmed however, as the news reported by Cisco caused some of the decline in other tech stocks. In fact, if Europe picks up you can expect Cisco and Juniper Networks to rebound.
At a price between $1 and $2 with an outlook of $2, I think it is best to hold off on this stock. Alcatel-Lucent is at a rock bottom price, but the stock has few solid prospects for growth. Given how susceptible it is to small changes in the economy, it is a risky stock until fears over Europe are quelled. I agree with many analysts by giving this stock a hold.
There may, of course, be coming news of something on Alcatel- Lucent's horizon, beyond being Citrix-ready. At such a low price, big news may give a return of 4 or 5 times your investment, easily.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.