The explosion of smartphone and tablet use by consumers has driven the demand for access equipment that services that traffic over mobile, packet core and optical networks. Service providers have been searching for ways to monetize investments in new capacity in an environment where capital expenditures into telecommunications, IT and infrastructure are shrinking as a result of macro-economic trends. Despite the boom in smartphone and tablet use, hardware and back end providers such as Alcatel-Lucent (ALU) and Nokia (NOK) and Research In Motion (RIMM) have all had an extremely rough couple of years. While there are many factors at play here, poor management decisions being the top of the list in the case of all of these companies, what does the future hold?
The current wisdom with respect to the smart choice for companies in the telecommunications sector is to figure out a way to converge into a provider of multi-service all Internet Protocol (IP) architecture. The speed at which technology merges and changes to keep up with demand is dizzying and providers have to go where the money is at the moment. Part of the difficulty is that these companies lack either the management foresight or the ability to be agile in this environment. The market has changed dramatically as a result of domestic recession, the European crisis and the slowing growth in emerging markets. While mobile use is now a necessity rather than a luxury, the competition in the space is so fierce that companies that cannot move quickly enough to capitalize on the boom are left in the dust.
Carriers such as Verizon (VZ) and AT&T (T) have shifted their investments from traditional land and voice service to investments in infrastructure to support mobile and cloud data usage to accommodate the demand for to video and content centric traffic. Companies that can service these demands such as Cisco (CSCO) and Juniper (JNPR) have had a rough ride as well. Cisco and Juniper provide, among other things, routers that service traffic in the mobile, and cloud data world. Cisco and Juniper have had the same trading pattern for the last year. Like most companies in any industry, July and August 2012 were dark months for common shares and Cisco and Juniper were not exempt from the pack.
Alcatel's recent foray into core routers that allow network operators to service cloud applications, video traffic, smartphones and tablets may be what pulls this company out of the doldrums. Like Nokia, Alcatel has a large patent library that it has been able to rely on in these tough times.
Research In Motion has a few tricks left up its sleeve, but the most attractive thing about RIMM is its $194 billion in cash and no debt. Also attractive, is the book value of $18.61 per share and the trading price around $7. Unattractive elements of this company are the management that just wouldn't let go until the damage was almost irreparable, the substandard quality of its products and poor marketing. Institutions own 65.5% of this stock and insiders own 10.24% of the float. The current short position on the shares is negligible. The good news is that the institutions are hanging in and that there is no short position, which means the stock should rise. The bad news is, institutions picking an exit point could hurt a retail investor if the institutions stampede at break even or better.
Alcatel's shares trade around $1.10. The 52 week range is $3.12 and $0.99. The price earnings ratio is 1.61 and the earning per share are $0.69. It does not pay a dividend. The company has total cash of $6.45 billion and total debt of $6.25 billion. The book value per share is $1.92. There is no measure of institutional or insider ownership listed. I'm not sure I believe that no institutions or insiders own any of this stock but let's say for the sake of argument this is somewhat true. It could indicate that institutions bailed on the stock a long time ago because of management's performance and because of the Euro-zone crises which saw mass liquidation of share positions by institutions back in the summer. Lack of institutional ownership is good in that there are (apparently) no large positions that can force the market either way in the event of good or bad news. Lack of insider ownership is either good or bad news depending on how you look at it. Bad news if management is not properly vested in the success of the company. Good news because Alcatel's management has been largely criticized for blundering the company's affairs so good riddance and make room for a new team that can be incentivized and turn the company around. The short position is less than 1%. These stats show that the damage has been done and there should be improvement in the stock's performance from here.
Compare the two previous companies to Nokia that trades around $2.67, has negative earnings per share of -$1.21 and pays a 6.8% dividend. Its cash to debt is better than Alcatel's at $12.45 billion in cash and $6.72 billion in debt and book value per share is $3.13. The short position is around 1% of the float. There are no institutional holdings listed.
There is a common thread in Alcatel, Research In Motion and Nokia. All of them have no short position, all of them have more cash than debt,and all of them are in the same industry sector. All of them have management that has been roundly criticized in the handling of these companies' affairs. All of them have higher book values per share than the current trading price, making these stocks a speculator's playground and a value investor's shrewd pick. For speculators, the actual business performance of these companies is not as relevant as the stock performance at this time. For value investors, the business performance is important.
Research In Motion is probably the trickiest pick of the three because of the insider and institutional ownership. The fate of the stock still rests in those hands. However, there is opportunity there, value investors will have to buy that new management can guide this company out of the mess it is in and have faith that any new products will be attractive to consumers. Speculators can pick an entry point down here and be very disciplined on what an exit point is, regardless of company performance.
Nokia has a couple of things going for it. The dividend yield may be attractive to some, but I see it as an inducement to get investors into the stock, which in the short term is a good thing. Speculators can work with this and will have to pick exit points. Any prolonged downturn in Europe will impact the company's business, which will in turn put the dividend at risk
Alcatel has nothing left to lose. Value investors would be picking up shares at the bottom of its trading range. Speculators will be doing the same.
Both Alcatel and Nokia are attractive as acquisition targets. Both companies have great patent portfolios. Research In Motion has a raft of problems and needs serious time and reconfiguring of its entire business plan in order to survive. It is Darwinian right now. Either it survives, gets bought by a bigger company, or die. For day traders, Alcatel, Nokia and RIM are buys for a quick ten percent. For investors, they should be considered long-term holds until better times come. For those already in them, I am about to say two of the most dreaded words in the investing vocabulary: Average down.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.