An opportunity to challenge the uncertainty in France and Europe:
The election of François Hollande brought a new uncertainty regarding his upcoming fiscal policy and relationship with Cac40 companies (he was elected more than one month ago and hasn't met with any CEO yet). We can then distinguish between two types of companies. Profitable companies out of the state's scope such as Total (NYSE:TOT), for instance. They are likely to become the main target of the government, should pay more taxes and show more transparency (the government announced Wednesday a new 3% tax on dividends).
The other companies have been weakened by the crisis but still play an important role in the French economy and epitomize its strength at the international level. This is the case for Alcatel-Lucent (ALU) regarding the increasing number of cell phone companies in France and the need for new networks.
Arnaud Montebourg, the minister in charge of productivity, declared last week that French cell phone companies should now buy their network equipment from Alcatel Lucent in order to help the company. I believe that there will be many measures like this one, especially at the European level in the upcoming months. (France and Europe still account for 6% and 27% of the revenues, respectively.)
As a consequence it could be the right moment to get more exposure to this kind of uncertainty and Alcatel-Lucent could be a good (and cheap) option.
To my mind, the European crisis is going to generate more and more uncertainty and there will be winners and losers in 2, 5 or 10 years. Major changes are likely to occur and transform the economic and financial landscape. Companies like Alcatel, weak but essential, don't have anything to lose right now.
A new positioning in the router market could boost the results at medium term
Alcatel Lucent recently entered the router market and started competing with Cisco (NASDAQ:CSCO) and Juniper (NYSE:JNPR). The market size is about €2.4b to €3.2b and Alcatel should be able to conquer between 5% and 10% short term according to Deutsche Bank's analysts. Each 5% market share should generate approximately €200m of revenues and €70m of EBIT, which is very positive knowing that the group could get 25% of the market in 5 years according to Natixis. The investment should generate 1% growth over the upcoming years.
New opportunities are arising in Alcatel's international development
Alcatel Lucent keeps betting on its international development and especially on Asian markets to drive the results. Even though the crisis in Europe jeopardizes its short term activity, 73.3% of the revenue come from the international market (+3.3% yoy).
The French company is very clear about the upcoming opportunities and is already established in Asia through various subsidiaries. For instance, Alcatel-Lucent is looking carefully at the situation in Burma where Alcatel-Lucent Shanghai Bell already implemented a network. The country could become a source of growth medium term. Be that as it may, South East Asia represents one of the main targets of the group and Asia already accounts for 20% of the revenues.
The emerging markets' need for new networks, as well as the international competition between cell phone companies should contribute to drive the demand over the next years. Alcatel-Lucent looks ready to take the opportunity, which is very positive.
How to benefit from the $1.50 bottom line?
Source: Yahoo Finance
The stock has hit the $1.50 level several times over the last 6 months, and this price is likely to become its bottom for the upcoming months. I believe that the stock can now reach $2.50, the last bottom line in 2011, before the end of the year.
The stock was trading Wednesday at $1.56, which accounts for a P/E of 2.30. Alcatel Lucent is highly undervalued and already trading below book value. Some good news from the operating level should boost the price very quickly.
I think that Alcatel Lucent still shows appetite for innovation, as well as a realistic development plan especially in emerging markets. Its current weaknesses and pricing could be an interesting opportunity to challenge the upcoming uncertainty in Europe without taking too much risk.
Disclosure: I am long ALU.