You're Being Sold the Same Old Story, I Wouldn't Buy It

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Tuesday, I wrote an article entitled, “Cutting Costs Should Not Be Part of This Company’s Plan!” after a report that Alcatel-Lucent (NYSE: ALU) was backing out of its original plan to divest assets as part of its restructuring strategy. This strategy has created gains of more than 100% since November 2012, yet on Tuesday, the stock fell 1.5% as rumors of this strategy falling apart hit the market. Turns out, these “rumors” were correct, and now Alcatel-Lucent has backed out of its original plan.

Insanity at its best

My first article showed how “cost-cutting” is a bad idea for Alcatel-Lucent. Why? The company has done nothing but “try” to cut costs for the last five years, laying off more than half its workforce and losing 70% of its stock value. Yet, for some reason, the company believes this plan will work.

On Wednesday, the company announced that it intends to cut costs by $1.25 billion and sell another $1.25 billion worth of assets within two years. Furthermore, the company plans to slash $2.5 billion in debt via selling its stock and additional asset sales.

Incredibly, Alcatel-Lucent’s stock traded higher by 3.2% on this insane proposition. The original plan was to trim its inefficient segments, those producing losses, and then focus on its growing and profitable segments. This would have been much more beneficial to shareholders.

What is the company telling you?

This is a real simple scenario, as the company is telling us three things.

First, there is severe separation within the company as to its direction. Aside from Ben Verwaayen’s resignation as CEO from Alcatel, just shortly after the announced “plan,” the company’s CFO, restructuring advocate, Paul Tufano is now leaving! He has been very vocal in his support of the original restructuring plan, saying it would cost $625 million this year but that major moves would occur. The company’s board, compiled of those from both the original Alcatel and Lucent, have been disconnected since the merger in 2006, and apparently have removed everyone who still supports a leaner and meaner Alcatel-Lucent.

Second, the $2 billion financing was worthless. Alcatel took $2 billion from Goldman Sachs and put its patents up as collateral. Now, the company is aiming to pay off $2.5 billion in debt (Goldman loan), with stock. Essentially, the company is preparing us for financing, or public offerings, indicating that it has no use for the $2 billion as part of a large restructuring program; and that it will dilute shares to pay off the debt.

Third, all of its “asset sales” are already accounted for and priced into the valuation of the company, as they have no plans to make any substantial moves. Keep in mind, the sale of its submarine optical unit for $1.1 billion has already been reported back in January. It hasn’t yet occurred, but judging by the company’s goal of selling “$1.25 billion worth of assets,” it does appear to be the $1.25 billion submarine segment. Thus, no further changes should be expected from this near bankrupt company, which refuses to make substantial changes.

There is so much upside with the original plan

This new “plan” is bad in every way, with the company’s only “plan” to cut more costs and raise more money. It is the quintessential example of insanity: Doing the same thing over-and-over and expecting a different result.

This is a company that posted quarterly sales of $4 billion last quarter, operates in six segments, and four of those segments saw significant growth of more than 5% year-over-year. In other words, Alcatel has about $2.7 billion worth of quarterly sales that is growing at a combined 8% year-over-year rate, nearly $11 billion in annual revenue. The remaining $8.5 billion in annual revenue weighs on the company and pushes operating margins to just 0.37%.

On Tuesday, I compared Alcatel-Lucent to Cisco and Ericsson in an attempt to show Alcatel’s potential value. If Alcatel would focus on the growing $11 billion in annual revenue, it would be growing faster than either Cisco or Ericsson. Just look at how it would compare if it would eliminate all of its garbage.

<table> <thead> <tr><th> </th><th> <p><strong>Alcatel-Lucent</strong></p> </th><th> <p><strong>Cisco</strong></p> </th><th> <p><strong>Ericcson</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Revenue</p> </td> <td> <p>$11 billion</p> </td> <td> <p>$47.88 billion</p> </td> <td> <p>$34.35 billion</p> </td> </tr> <tr> <td> <p>Revenue Growth</p> </td> <td> <p>8%</p> </td> <td> <p>5%</p> </td> <td> <p>2%</p> </td> </tr> <tr> <td> <p>Price/Sales</p> </td> <td> <p>0.40</p> </td> <td> <p>2.77</p> </td> <td> <p>1.14</p> </td> </tr> <tr> <td> <p>Operating Margin</p> </td> <td> <p>6%</p> </td> <td> <p>22%</p> </td> <td> <p>8%</p> </td> </tr> </tbody> </table>

If Alcatel would cut its unprofitable and declining segments, it would no longer be the black sheep of the telecom equipment industry, and significant upside would still exist. It would be a fast-growing company and would still be cheap compared to sales. In fact, because of its presumed growth and its profitability, I think it could trade at the same premium as Ericcson, or a near 200% premium to its current price. Because let’s not forget, with the sale of assets, Alcatel could cut debt which would likely be greatly rewarded by Wall Street.


At this point, Alcatel can not compare to the operating efficiency of either Ericcson or Cisco, nor is it willing to try. Both Cisco and Ericsson have grown from the ground up, and continue to gain market share in several of Alcatel’s segments; as Alcatel has little money to invest in its growth. Therefore, Cisco and Ericsson remain market leaders, and great investments, while Alcatel is left in the dust selling its same old story.

In my opinion, the company made a horrible mistake by choosing to continue with operations that has led to its decline. As a result, those who had a plan have left, the only planned sale is already priced into the stock, and we can expect more of the same from a highly disappointing company. 

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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