Alcatel-Lucent: A Lot Of Concerns, But A Lot Of Potential

| About: Nokia Corporation (NOK)

I suppose it's best to start by saying that I am no longer a shareholder in Alcatel-Lucent (ALU). On Tuesday, I woke to find that the stock had fallen 18% after the company lowered its guidance for the upcoming quarter, and then added that it would miss prior full-year guidance. As a result, my $1.25 stop-loss order was initiated and my shares were sold, however, $1.25 was never seen as the stock opened at $1.13.

At the end of 2011 I diversified my portfolio, and for the most part, it has been a huge success, with the exception of ALU. I invested $15,000 into ALU for an average price of $1.52, therefore my $4,000 loss isn't as bad as some but still enough that I must admit that I was wrong regarding ALU. I guess the big question is, since all the bad is out in the open, how should investors play ALU?

I have said for the last year that Alcatel-Lucent is a victim of circumstance; a stock driven lower by the mere fact that it's a European company. The fact that ALU is a European based company has weighed heavily on investor confidence and the speed at which it can grow. Yet despite such barriers, including significant competition, the company continues to announce encouraging news to suggest further growth based on expansion and even European countries that are expanding networks.

At this point, I see Alcatel-Lucent in two ways: A company with several short-term economic issues but a company with long-term potential. In its latest revision the CEO said that the second half of 2012 will be stronger than the first half, however if you look at the performance of 2011 then you would notice that the second half was also stronger than the first. Therefore, this doesn't tell us how the company will perform year-over-year or if it will see any growth in its core businesses; but based on what we've seen throughout the first half of 2012 I doubt we see any level of measurable growth for this company in 2012.

The most significant upside for ALU comes later down the road, perhaps in 2013. However, with so much uncertainty in Europe, it is hard to be certain. The company does have over 25,000 patents, operates in 130 countries, and is expanding at an incredible rate. The company is moving its services into rural areas, is working with Bharti Airtel on designing an IP access network in parts of Asia and Africa, and is building a faster broadband access throughout China for up to 800 million people for China Telecom. Therefore, the catalysts are present for ALU to turn its business around very quickly and efficiently.

I will conclude by saying that I do plan to buyback shares at some point in the future, but not right now. At this point there are simply too many questions and not enough answers. I still believe ALU is among the most undervalued companies in the market and if you compare its fundamentals to its competitors then you would see the level to which it's undervalued.

  Alcatel-Lucent Cisco Juniper Ericsson  
  ALU (CSCO) (JNPR) (ERIC)  
Market Cap (billions) $2.54 $86.00 $7.50 $26.76  
Revenue (billions) $18.22 $45.57 $4.50 $31.98  
Price/Sales 0.17 1.90 1.73 0.84  
Trailing P/E Ratio 1.63 11.82 24.41 11.14  
Click to enlarge

All data collected from Yahoo! Finance

In terms of size, Alcatel-Lucent creates roughly 40% as much in sales as Cisco. This may come to a surprise, especially when you consider its market cap is $2.54 billion compared to CSCO's $86 billion. The two businesses are different, however if you compare ALU to any of its competitors you can see a major difference in the valuation. Alcatel has posted $529 million in net income over the last 12 months, JNPR has posted $311 million; yet JNPR is worth 3x as much despite reporting a fraction of ALU's revenue.

The truth is that this entire industry is facing a number of problems. It's not just ALU, however ALU seems to be the stock receiving the most attention. In all fairness ALU has poor operating cash flow and its accumulated deficit of nearly $15 billion would strike fear in any investor in this highly fragile economy. But when you look at the fundamentals, ignore the price movement, and look at the recent developments it does appear as though the stock is presenting value. Therefore, I still believe it's a good investment, however I am not going to be nearly as optimistic as I was in the past. I now have a limit order for ALU to be purchased once it reaches $2.00, because at this point I think it could still go either way in terms of trend, and because of the uncertainty I'll only invest 1/3 of my previous investment. And if ALU can begin moving in the right direction, it could very easily become a $8 stock, but if not, it could easily trade to $0.50 with the level of pessimism surrounding this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This article is for informational purposes only and should not be used to make any investment decisions