What Do Alcatel-Lucent Investors Really Want?

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

Alcatel-Lucent’s (NYSE: ALU) decline in the last year has been epic; as the company’s near-term outlook looks dim. Despite strong gains from the overall market, Alcatel is trading at 20 year lows, and on Friday slipped even lower after earnings. As a result, I am looking at what investors really want from this company, and how it can finally create value for its shareholders.

A Large Undervalued Company

Alcatel-Lucent is one of the largest companies with a ~$1.00 stock price that you’ll ever find. The company, which is valued at $2.25 billion, posted a 2.8% sales decline year-over-year, but sales were still an incredible $4.66 billion! To put this into perspective, Celgene Corporation had $1.4 billion in sales during its most recent quarter, but has a market cap of $30 billion. As a result, I call Alcatel-Lucent the biggest little company in the market.

With Alcatel-Lucent being priced for disaster, and it is priced for disaster, why did it sell off so sharply after earnings? With a price/sales ratio of 0.13 you’d think the market would be prepared for anything Alcatel could throw at it. But for some reason when the company announces weak earnings the market still acts like it’s a surprise, and the stock loses significant value.

Perhaps this already undervalued company lost 10% of its value because it burned through $464 million in cash during its recent quarter. Or maybe it was the realization that this company has more than $2 billion in debt that is due over the next three years. Either way, investors reacted, and the company looks to be losing the support of investors very quickly.

Getting Rid of Assets!

This is a company that has announced contract-after-contract that implies increased sales, and has cut 1,000s of employees, yet the losses continue to pile up. The company mentioned in its conference call that it has assets it can dispose of, however it already tried leasing out patents, and so far it has been unsuccessful.

The company’s mention of “assets” to dispose led me to think of which assets it might be trying to unload. Like I said, the company is massive and has operations spread all throughout the world. It is a major provider to companies such as AT&T and Verizon, therefore its existence is crucial to the network of these large telecom companies.

With large debt payments due over the next few years, angry shareholders, and a stock that is priced in preparation of a bankruptcy, I see only one real plausible solution for this company, to go on sale. This may sound crazy, but think about it, Alcatel’s services are too important to too many companies for the company to fail in bankruptcy. Its physical assets would aid a company in an acquisition by limiting the amount of debt unloaded onto the acquiring company.

With the growth of mobile, and the importance of 4G networks (among others), Alcatel-Lucent cannot fail, but it can put pressure on various providers to acquire “assets”. As a European based company, Alcatel-Lucent reserves the right to withdraw services in the U.S., if it wished. Companies such as AT&T would be crushed by the disruption in its network, and would be forced to “make a move.”

Alcatel-Lucent has 29,000 patents, more than 70,000 employees, nearly $19 billion in sales, and operations in more than 130 countries, therefore Alcatel definitely has the “assets” to dispose. The company has tried laying off employees to cut costs, but needs something more drastic. It needs to go through all of its operations and eliminate the services that are least profitable. And if a service provider or one of its partners wish to retain its services, then the company can acquire the services from Alcatel-Lucent and take on the problem.

Who Cares About Revenue?

Looking ahead I think Alcatel’s best chance at survival is to downsize. Investors could care less about revenue, Alcatel has tons of revenue and it’s not producing gains. Investors want profitability and a strong balance sheet.

If you need proof that Alcatel-Lucent would not be negatively impacted by a loss of revenue then take a look at Juniper Networks (NYSE: JNPR). Both companies operate in the same industry and face similar economic struggles. The difference is that Juniper is a $9 billion company, with revenue of $4.35 billion over the last 12 months. Therefore, Juniper is less than 25% the size of Alcatel, yet has four times the valuation.

The reason that Juniper sports a better valuation, and is a better stock, is because it gives investors what they want: strong balance sheet and decent margins. The only way to obtain what investors really want is to eliminate the parts of the business that does not benefit the company, by selling or shutting down the segments that serve no purpose to the company. Or, the company could try to sell itself to a company that depends on its services, such as AT&T. In that case, Alcatel would be worth 5-7x EBITDA, or $6-$10 billion! Either way, I think it’s a win for investors, and due to its valuation, I think the company’s problems are priced into the stock, a bankruptcy is very unlikely, and that upside is present from this point forward.   

BrianNichols has no positions in the stocks mentioned above. 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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