News From AT&T Makes This Stock Rally

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

Last Wednesday AT&T (NYSE: T) announced that it would be boosting capital spending by 16%, to $22 billion, over the next three years to upgrade its wireless and wireline networks. As a result of this news, telecom equipment providers have all rallied due to the belief that other providers will follow AT&T’s lead. But one in particular, Alcatel-Lucent (NYSE: ALU), should reap the benefits.

AT&T’s decision to upgrade and invest in its network has been controversial in the days that followed the announcement. The country’s ever expanding need for more data makes the move almost necessary, however with so much economic uncertainty the decision is also a big risk.

For the last several months there have been rumors that AT&T was looking to sell some of its assets, especially in rural areas. Yet the news on Wednesday suggests that the company is wishing to expand in these areas, to perhaps become more competitive with Verizon, the company with the largest wireless network.

Regardless of controversy, the 16% boost in capital spending should lead to revenue growth 100 basis points above the U.S. gross domestic product, according to the company, and greater EPS growth for the next three years. But even more importantly, this move is very important to Alcatel-Lucent, and could result in significant fundamental improvements for the telecom equipment company.

Alcatel-Lucent is not only AT&T’s largest equipment vendor, but is also the most undervalued of the telecom equipment companies. As part of AT&T’s spending plan, Alcatel-Lucent will benefit every step of the way, especially with AT&T’s plan to bring LTE coverage to 300 million people by mid-decade. These investments in LTE are due to the smartphone/tablet movement, in which global capital spending on 4G/LTE structure is expected to triple in 2013, as all telecom companies thrive to stay ahead of competition and capitalize on the large demand.

Like I said, Alcatel-Lucent is the best positioned to capitalize on this movement. Not only is the company a near $19 billion company, but it also has a presence that stretches into 130 countries, 29,000 patents, and (as I mentioned) is AT&T’s favorite partner. Alcatel-Lucent already announced a new partnership in China to develop its network, and although Europe is struggling, most countries are also electing to develop their network.

Despite all these promises, upside, and assumed strength in the coming year, Alcatel-Lucent is trading with a five-year loss of nearly 90%, with a loss of 50% during the last year. The company is trading with a market cap of just $2.50 billion, or a price/sales of 0.13. Granted the company has seen a 5% sales decline and is now negative in operating cash flow, and faces some financial headwinds. But, its future is now looking brighter than ever, and because of its presence and its importance, its chances of bankruptcy are slim to none. And its chances of trading significantly higher are great. 

BrianNichols is long ALU. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend AT&T.; 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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