In my view, shareholders of Alcatel-Lucent S.A. (ALU) should not be looking for much performance from their investment over the near term, because the stock has effectively lost its mojo. Sure, ALU gained good ground earlier this month after the Federal Reserve announcement, but so did stocks generally. And just as stocks generally softened not long after, so did ALU. Investors would have been better off in the SPDR S&P 500 (SPY) this month or even in the shares of some of the company's rivals like Cisco (CSCO). The reason I believe this is so (and to put it in more technical terms) is because the stock is lacking alpha, or a company specific catalyst to outgain the market generally. For that reason, and despite its deep price drop, I would not buy ALU today, and instead find other use for limited capital resources. For those who held the shares all the way down, there's an opportunity to take losses for tax purposes here before the company potentially finds its mojo again (should be longer than 30 days and likely more than a quarter in my view). So, even for long-term believers, I would sell the shares and reconsider reentry in the future.
Chart by Yahoo Finance
It was supposed to be so much better than this. The outlook for Alcatel-Lucent S.A. once even included positive numbers on the per share line for this fiscal year. But alas, after revision and reassessment, what was an analysts' consensus projection for earnings per share of $0.17 just 90 days ago is today a forecast for a $0.06 per share loss.
ALU shares traded as high as $3.20 over the last year and above $6.50 not long before that. It was because at long last, it seemed the company was on a path to recovery. However, today, with the stock just slightly above a dollar a share, an entirely different perspective reigns. So who stole ALU's mojo then?
The stock last lost its alpha when it warned about its quarterly results on July 17th. At least that was what took it to $1.11 from $1.37 (down 19%) overnight. Obviously, other disappointments worked against the stock over the months preceding this event, lowering it from above $6. Still, on that fateful day in July, ALU offered a disappointing preliminary outlook on its fiscal second quarter. The company also lowered expectations for the second half of 2012, saying it would not meet its own adjusted operating margin guidance. ALU attributed its troubles to the difficult macroeconomic environment, which it said was hampering its order book. When the company later formally reported its second quarter results on July 26, a loss of $0.12 per share fell far short of the analysts' consensus for breakeven earnings. However, its results included restructuring charges and some other items I would have excluded, and analysts likely did as well. Also, its reporting date happened to coincide with Mario Draghi's celebrated declaration to defend the euro, benefiting the stock.
With the company's bottom line 2012 and 2013 outlook so profoundly changed, there's little catalyst for the stock near term. Oh sure, it is proactively acting to match its operations to the realities of today, but an investor betting on this to take quick effect is akin to catching the proverbial falling knife. By now, long time investors in the shares already have scars and pain to recall, enough to keep them from attempting such a daring feat. Thus, ALU has lost its alpha.
Considering that its beta is 2.0, and with global economic data and discontent outweighing central bank actions from both sides of the Atlantic, there's all the more reason to avoid the shares today. Management recognizes the situation though, and I was pleased with its statement:
Commenting on The Performance Program, Ben Verwaayen concluded: "These times demand firm actions, but as this will involve shrinking our employee base and exiting certain non-profitable contracts we will use The Performance Program to execute in a measured fashion. However we are taking aggressive action that will improve our agility in the marketplace while remaining fully committed to both our customers and continuing to deliver world-class innovation."
And also this statement: We have increased cash and decreased debt since Q4 2008 with a net benefit of Euro 625 million. And we target a strong positive net cash position at the end of the year 2012.
The macroeconomic argument is legitimate. The company's competitors, including Cisco Systems and Ericsson (ERIC) have not had the best of times either of late. Indeed, funds focusing on communications equipment companies, like the Fidelity Select Communications Equipment Fund (FSDCX), reflect the industry wide weakness.
Still, until ALU recovers its mojo, I expect neither valuation nor price will matter for the upside argument. Its valuation is threatened, given a book value that could contract. Furthermore, its forward P/E ratio of 13.9X the analysts' consensus EPS estimate for $0.08 in 2013 isn't as supportive as one might think, given that the estimate is on the downslide (from $0.22 90 days ago). So, for groovy investors, I suggest other ideas for now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.