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tuan nguyen
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I am a long term investor mostly in technology and telecom where I am a specialist for 10 years working in the domain for France Telecom in Europe, Alcatel Lucent in US
  • Alcatel Lucent - Trend Analysis For Long Term Investor 2 comments
    Apr 23, 2012 6:30 PM | about stocks: ALU

    Alcatel-Lucent is a worldwide provider of telecommunications equipment and related services. The company's customers include fixed line and wireless telecommunications operators, internet service
    providers, governments and businesses. It offers end-to-end solutions for triple play, IP network transformation, 3G wireless, carrier IP/MPLS, broadband access, terrestrial and submarine optical, next-generation IMS and video applications and services. The company operates in more than 130 countries.

    Despite our view of ALU's solid positions in Europe and the U.S, analysts forecast a 4% decrease in revenues in 2012 as operators defer network upgrades and as ALU's broadband access and
    optics portfolios suffer pricing pressure. Analysts believe services (about 25% of revenues) and the ability to transition CDMA business into LTE and network core sales are keys to longer-term growth.

    Let have a look of all major ratios from ALU in 2011 and see what could be the trend for ALU stock in 2012.

    I. ALU DATA ANALYSIS

    1. ALU strong ratios in 2011
    Gross margin
    Net profit margin
    EPS
    P/E
    PEG (5 yr expected)

    +Gross margin and Operating margin are in average of industry but still smaller than direct competitor Cisco and Ericsson
    +ROE, Net profit showing a very positive sign as company having better management even sale decreased
    +Company started paying dividend after 5 years of loss, very good indicator (0.37 per share)
    +Earnings P/E multiple is 5.0X, compared to 14.7X for the S&P 500.
    +Expected earning is on the track of market expectation

    2. ALU - weak ratios in 2011
    Rev Growth
    P/S
    P/B
    Beta
    Return on Equity
    Lt debt to equity
    Current Ratio

    -Revenue decreased 8% last year to compare with Cisco or Ericsson or Industry which increased 10%
    it is the bad sign of company that could not generate more revenue as expected by investor
    -P/S and P/B are too small to compare with other competitor, even it is in average of industry=> stock risky not attractive, discount price
    -Beta is twice higher than competitor, stock is more violated moving when market goes up/down ==>more risk
    -ROE is good in industry 19% but to generate this return, company has to leverage 4 times of net profit.
    to be able to generate similar ROE, Cisco does need only need 1.2 times of net profit, Ericsson needs 3 times
    -Debt is still high, 3 times than Cisco, 6 times than Ericson, showing company wanted to use higher leverage to generate higher ROE
    -Better cash management versus Liabilities : stronger current ratio can assure investor that company can be able to pay debt better
    weak current ratio showing stock is so risky in case of crisis or downtrend of market economic and Beta is too high

    3. ALU data ratios TTM 2012
    Gross margin 34.97%
    Net profit margin 4.36%
    EPS 0.37
    P/E 5.42
    PEG (5 yr expected) 0.79

    Price to Earnings: ALU- 4.0 Industry Average- 19.1
    Price to Sales: ALU- 0.2 Industry Average- 1.4
    Price to Book Value: ALU- 0.7 Industry Average-1.9
    Price to Cash Flow: ALU- 1.7 Industry Average- 13.2
    Estimated EPS 2012: ALU- 0.26

    -ALU stock pay's out no dividend, then the DDM is irrelevant so we use CAPM to provide a market implied Required Return (K = Riskfree + Beta(Mkt Premium))
    Last EPS=0.39, Beta = 2.41, Rf=0.03 (10 years T-bond) with Expected return=0.08
    ==>Required return = 0.03 + 2.41*0.05=15%

    II. ALU TREND ANALYSIS
    1.Risk CAPM calculation
    Expected return of ALU calculated in I. is 15% in 2012 with beta 2.41: it telling us that ALU carries more risk than the overall market; this extra risk means that we should expect a higher potential return than the 15% of the S&P 500. S&P500 has expected return 10% for 2012, so our target price in 2012 is (1.15+0.10)* current price (1.9) = $2.4 or P/E expected 9.2 (2.4/0.26) in 2012 EPS, which is well within the historical range.

    2.Earnings Strength is VERY NEGATIVE
    -Alcatel Lucent's earnings have decreased from $0.39 in 2011 to an estimated EPS $0.26 in 2012, they have shown strong deceleration in quarterly growth rates when adjusted for the volatility of earnings. This is an indication of weakness that could lead to declining earnings.

    -Recent changes to analysts' forecasts and variances between reported and estimated earnings provide important information about a company's future earnings performance. Earnings forecasts for Alcatel-Lucent have been decreasing which portends a deterioration of future earnings growth. The company has also reported higher earnings than those predicted in earlier estimates in 2011. This indicates an ability to exceed analysts' expectations and the potential for improving earnings growth in the future but this is very difficult to deliver the same result in 2012 due to decrease of potential sale in 2012

    3.Price Movement is POSITIVE
    -Alcatel-Lucent's stock price is down 72% in the last 12 months, down 7.5% in the past quarter and down 23.9% in the past month. This historical performance should lead to above average price performance in the next one to three months.
    -Historical price action of a company's stock is an especially helpful measure used to identify intermediate and short term performance potential. Long term historical performance is a good predictor of future price performance, but much more importantly, large price movements over the intermediate and short term tend to reverse themselves.

    4.Relative Valuation is VERY POSITIVE
    Alcatel-Lucent's EPS 17.7% ranks above 99% of the other companies by using high leverage 6.27, indicating that it is undervalued. Operating earnings yield, an earnings-to-price ratio based on the last 3 quarters of operating earnings and the current quarter's estimate, has proven to be the most reliable relative valuation measure. A stock may stay undervalued or overvalued for a long period of time. For this reason, it is important to combine this factor with shorter-term predictive factors such as earnings momentum or price momentum to identify more imminent valuation adjustments.

    5. Overall recommendation: HOLD
    Alcatel-Lucent is current trailing 12-month P/E is 4.0x, compared to the 19.1x average for the peer group and 13.6x for the S&P 500. Over the last five years, ALU shares have traded without dividend so no P/E calculated excepted last year showing the good sign of return from company even beta is still very high 2.41 - very risky stock.

    The stock is trading at a discount to the peer group, based on forward earnings estimates. Our long-term HOLD recommendation on the stock indicates that it will be in line with the U.S. equity market over the next six to twelve months.

    ALU stock is very risky investment, strap (cheap but hard to improve, avoid high risk). Some ratios are better with strict management can improve situation. ALU is high risk investment with high reward when: -telecom market uptrend
    -good management with strong earning as market expected
    -less leverage, control of debt
    -improve sale and cash flow vs industry/competitors

    Stocks: ALU
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Comments (2)
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  • Found a great article at last with nice analysis...
    What are your current thoughts now under 1.5pps??
    Shall we expect 1.85+ (20% return is more than enough) before end of 2012?
    12 Jul 2012, 10:56 AM Reply Like
  • Can ALU compete in Network IP and Service, its strongest segments in recent Q4'12?
    7 Feb 2013, 10:49 PM Reply Like
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