3 Terrific Reasons To Buy Alcatel-Lucent On The Pullback

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Alcatel-Lucent has dropped 21% this year, but it is rapidly cutting down its losses and seeing traction in new business initiatives.

Alcatel-Lucent has tied up with Intel and Qualcomm to tap the cloud and small cell market.

Alcatel's cost reductions are yielding results, and the company's enticing valuation and bottom line growth projection makes it a good bet.

Down 21% this year, Alcatel-Lucent (NYSE:ALU) received a shot in the arm when JPMorgan (NYSE:JPM) upgraded the stock from Neutral to Overweight, citing its impressive cost-cutting moves. Under its Shift plan, Alcatel has made solid progress to cut costs, and it is also focused on growing the business. In addition, Alcatel has entered into partnerships with the likes of Intel (NASDAQ:INTC) and Qualcomm (NASDAQ:QCOM) to deliver new technology.

Rapid improvements

Alcatel's recent quarter showed signs of improvement, and the company targets becoming profitable going forward. Management has undertaken various strategic initiatives, which have narrowed its losses considerably. For instance, in the first quarter, Alcatel's loss decreased by 80% from the year-ago period. Its adjusted revenue also increased 4%, but due to currency fluctuations, there was a decline of 3.3% as compared to last year. Going forward, the company expects the good times to continue on the back of several impressive moves.

Alcatel recorded solid double-digit growth in its IP routing business. Management is pleased with the results, as they reflect the strength of the decisions taken by the company to reposition itself in IP, Cloud, and ultra-broadband access to reignite growth. Its gross margins have also improved on account of a favorable product mix, improved profitability, and continued management of its cost structure. Moreover, its partnership with Nuage and Numergy will further enhance its momentum.

Alcatel has achieved a milestone in terrestrial optics with its first year-over-year growth in the first quarter since 2011. The company is delivering good growth in its wireless segment, and to further enhance its growth in this direction, it plans to invest in LTE. During the first quarter, there was considerable demand for LTE deployments in high-density markets like North America. Alcatel is also seeing increasing traction in broadband products, mainly led by high demand from EMEA and Asia-Pacific outside China.

Two key partnerships to drive growth

The company has entered into partnerships with technology leaders like Intel and Qualcomm. Its tie-up with Intel is of specific importance, as both companies are working to speed up adoption of the cloud. Both companies will help operators across the world improve the time to market and operational efficiency, and will also push the development of new products and services for consumers and business customers with the use of cloud and related technologies, with specific focus on network function virtualization.

According to a press release:

"Network Functions Virtualization (NFV) appeals especially to mobile service providers now because it allows them to innovate more quickly and easily while providing the best return on their investments in an all-IP network infrastructure such as LTE. Specifically the expanded collaboration will focus on three areas to accelerate the development of three Alcatel-Lucent platforms optimized on Intel architecture to improve performance and scale."

The NFV market is expected to grow at a rapid pace. According to Mind Commerce, "global spending on NFV solutions will grow at a CAGR of 46% between 2014 and 2019. NFV revenues will reach $1.3 Billion by the end of 2019."

Hence, both companies are making the right move by collaborating to target this fast-growing market. In addition, Alcatel is partnering with Qualcomm to develop next-gen small cells. According to a report:

"Alcatel-Lucent and Qualcomm plan to collaborate on small cell base stations that enhance 3G, 4G and Wi-Fi connectivity in residential and enterprise environments. The partnership combines Alcatel-Lucent's experience developing small cells with Qualcomm's small-cell chipset expertise.

The two companies hope to develop small cells with enhanced wireless network reception in environments such as urban areas, shopping malls and other enterprise venues. By working together, Alcatel-Lucent and Qualcomm Technologies intend to accelerate the adoption of small cells and alleviate the impact of mobile data on wireless networks.

As the density of small cells grows over time, the chances for interference will grow commensurately. As a result, future technologies will need to provide better signal-to-noise reception and improved optimizing.

To facilitate this acceleration, the two companies plan to jointly invest in a strategic R&D program to develop the next generation of Alcatel-Lucent lightRadio small cell products featuring Qualcomm Technologies' FSM9900 family of small cell chipsets."

Now, small cells are a fast-growing market. As per Infonetics Research, 642,000 small cell units were shipped in 2013, a 143% jump from 2012. More than 50% of these small cells were used for 3G technology. With the growing adoption of 4G, it is expected that the small cell market will boom going forward, resulting in a 65% jump in 2014. Hence, it is clear that Alcatel is expanding its presence in key areas, and this should help the company improve its performance going forward.

Impressive cost reductions

Going forward, Alcatel management is focused on cost reductions to improve its bottom line. As a result, the company plans to save around 1 billion euros by 2015, by way of cost cuts and divestments. So, it is not surprising to see why analysts expect Alcatel's bottom line to grow at a tremendous CAGR of 100% for the next five years. At a forward P/E of just 16 and a PEG ratio of 0.69, Alcatel looks like a bargain considering the rapid earnings growth expected going forward.

Moreover, the company has significantly reduced the rate of cash burn to 389 million euros, a drop of 146 million euros from the year-ago period. As such, Alcatel is making all the right moves, and it should continue getting better going forward. So, investors should consider taking advantage of Alcatel's pullback by buying more shares.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.