Alcatel Presents Upside Regardless of China Mobile Deal

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Telecom equipment maker Alcatel-Lucent (NYSE: ALU) was already cheap, but a promising new deal makes it look like an even better value. The company's long-term pact to equip one of China's biggest wireless providers could significant boost sentiment and lead shares to reflect its worth.

Alcatel-Lucent is a company plagued with loss and frustration, losing 90% of its valuation during the last five years. The company has struggled to thrive in a challenging and competitive global economy. It has the lowest margins in its industry, nearly $5 billion in debt, an accumulated deficit of $16 billion, and is no longer profitable from its day-to-day operations alone. Yet despite these concerns, the company has seen drastic progress since 2009, and remains a very cheap stock with large upside potential.

On Wednesday Alcatel-Lucent’s bad luck may have changed. The stock rallied 8% when news broke that the communications equipment company won a contract to deploy some of China Mobile’s new TD-LTE trial network. This network extends into 10 of the largest cities in China and is a good way for Alcatel to extend its presence in China along with establishing an even larger network.

The deal with China Mobile is significant enough to provide long-term revenue growth throughout the Chinese region. However, aside from the “potential’ and “promise” of the China Mobile deal, this is still a company that is nowhere near reflecting its fundamentals. Alcatel Lucent trades with a market cap of just $2.40 billion and has some of the most attractive metrics in the entire space.

Alcatel-Lucent has nearly $19 billion in sales! To put this in perspective, think about the largest communications equipment company, Cisco (NASDAQ: CSCO). Cisco has reported revenue of $46 billion over the last 12 months. This means that Alcatel-Lucent is about 40% the size of Cisco in terms of sales and presence.

If you compare Alcatel-Lucent to Juniper (NYSE: JNPR) the distinction in size isn’t even close. Juniper has posted just $4.33 billion in sales during the last 12 months, which means that Alcatel is nearly five times  larger as a company. Yet Juniper trades with nearly five times the valuation of Alcatel-Lucent, and Cisco is valued roughly 40 times the value of Alcatel-Lucent. Alcatel should trade with a much larger valuation, based on its size alone.

Alcatel is going to return larger sales from its deal with China Mobile, but at this point, we don’t know how much or when the deal will reflect in fundamental growth. Therefore, we must base the stock’s upside on current fundamentals, which remain very attractive. I believe there is significant upside potential, and that shares of this stock are priced at the bottom of its range, with nothing but upside ahead. And if the China Mobile deal continues to create optimism among shareholders, then this stock could rally very quickly, returning market-leading gains in the months ahead.

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BrianNichols owns shares of ALU. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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