Time to Drop Alcatel?
Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Back in February, Alcatel-Lucent (NYSE: ALU) hit what you could call a high; but since then it has lost nearly two thirds of its value.
The telecom sector as a whole has been experiencing a bad time. Alcatel’s GSM revenue dropped nearly 90% in the first quarter thanks to the woes of Europe, which caused investment in equipment to diminish. The second quarter saw Alcatel’s poor luck continue as Chinese demand dropped by another 21%; however there were silver linings in the form of Japan and Australia.
The telecom industry is in a little bit of a rut, with competitors such as JDS Uniphase and Juniper systems losing nearly 40% of their market capitalization at one point. Even the leader in the industry, Cisco (NASDAQ: CSCO) saw its share price fall by nearly 30%. But Alcatel’s problems go far deeper than that, because while most of the other companies seem to have bounced back a bit, Alcatel is continuing to slide further.
Alcatel had its recommendation cut to “sell” from “neutral” by Goldman Sachs on Oct. 5, while Credit Suisse reiterated its “underperform” rating last week, saying that the company's weak first-half trends are likely to continue into the third quarter. However, the outlook for network equipment makers is positive, despite their poor performance and results. According to the people at TheInfoPro, investment in network technology remains a priority, with core routing and switch getting top priority, followed by wireless rollouts and a technology refresh .
Even though basic handsets account for 88% of the market, mobile traffic data doubled for the fourth year in a row last year, with smartphone usage tripling. The increased pressure on networks means that small cell technology is the best method to handle the large loads. Alcatel-Lucent is in a unique position to capitalize on this, because it owns key femtocell deployment agreements, allowing its technology to be deployed on telephone poles, buildings, and anywhere else where towers don’t really work.
The question is whether Alcatel will survive long enough to see its plans executed. The company has introduced a string of cost cutting measures in the hope of saving up to $1.6 billion. European carriers are forced into cost cutting thanks to competition from Asian companies that benefit from cheaper input costs.
Alcatel will depend on carriers such as Sprint (NYSE: S) to make a difference. The carrier has a deal with Apple to deliver $15 billion worth of iPhone sales. That’s a large target, and if the rumored deal with Softbank comes through, it could be used as a cushion to soften the blow if Sprint falls short of the mark. However, Sprint is looking at upgrading its network. And in that case, Alcatel will be one of the primary vendors for the network upgrade thanks to its small-cell technology.
I don’t really think too much of the company's stock, but one of the companies that I would recommend you to take a look at is Cisco. From a value investors point, the networking leader seems to have a lot going for it.
The company has about $48.72 billion in cash, and its long term debt is somewhere around $16 billion. This means that Cisco’s cash reserves exceed that of Intel, Oracle and IBM. Cisco reported an income growth rate of 23.9% and sales growth of 6.6%. The company also delivered a 17.46% net profit margin and a P/E of $12.62. Earnings per share also went up by over 50%. Given all these stats, I feel that the company is undervalued considering its large cash stockpiles, and think that it would make a sensible buy for a value investor.
However, growth in this sector is expected to be slow in the short term because of weak global demand, so if you’re getting in, you’re getting in for the long term.
ceciljohn2002 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.