Is There Light at the End of the Tunnel?

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For quite some time, the market has been treating Alcatel-Lucent (NYSE: ALU) as if it were a step away from declaring bankruptcy. Not without a reason. The once invincible telecom giant has been struggling to slow down its bleeding and sustain accelerating growth rates. Over the past five years, the stock has been trapped in a repetitive trend pattern of extreme volatility. Throughout 2012, Alcatel-Lucent fell into a steep downtrend and reached bottom-low levels. Nevertheless, lately, some encouraging news for the company's debt financing led to an unexpected price soar. Is Alcatel-Lucent really coming back from the dead or is just experiencing a temporary surge?

The risks

Despite its global reach, still, about 25% of the firm's revenue derives from Europe. The weak economic climate in that region, and the consequent low spending from European service providers have caused a serious setback. In the most recent earnings release, Alcatel-Lucent reported a double digit decline in Western Europe's revenues compared to last year. This year-over-year deterioration was partially offset by a modest 2% acceleration in North America and a 7.8% increase in revenues from the rest of the world, and especially from Central and Latin America.

Over the past couple of years, the firm has been unable to generate fruitful free cash flow. For the period 2011-2012, free cash flow to net income average ratio remained negative, leading to a burdensome debt overload. With a debt-to-equity ratio way above the industry's median, the firm is considered to be highly leveraged. As of September, 2012, it had roughly €4.7 billion in cash and marketable securities. Its net debt position was negative with debt exceeding cash by €84 million. Moreover, the company had over €2 billion in debt maturities until 2015.

Fortunately, the recent loan agreement with Credit Suisse and Goldman Sachs is expected to, somehow, ease the firm's looming liquidity problems. Alcatel-Lucent achieved a financing package that will serve as a safety cushion against short-term debt obligations and restructuring costs. Additionally, the firm is considering selling off smaller assets and getting rid of its less profitable businesses. This way, it can hope for a cleaner balance sheet in the medium term. However, without healthy cash flows, the road to recovery will remain shady.

Opportunities for sustainable growth

Innovation has always been a key aspect of the company's general growth strategy. Alcatel-Lucent holds a diverse portfolio of about 29,000 active patents and is home to Bell Labs, one of the world's foremost research centers. According to MIT's 2012 Technology Review, Alcatel-Lucent stands among the world's most innovative companies for its significant breakthroughs, such as the lightRadio (tm). This small cube delivers lightning fast Internet access while lowering power consumption and operating costs on wireless networks.

The Paris-based maker of telecommunications gear could benefit from its competitive 7950 Extensible Routing System (XRS). The firm is aiming to leverage its base of edge routers in order to establish a strong foothold in the core router market. Currently, the router market is dominated by Cisco Systems (NASDAQ: CSCO) and Juniper Networks (NYSE: JNPR). Cisco, the world's leading provider of computer-networking equipment, faces limited challenges primary due to its diversified income stream. It holds a strong cash position, which leaves room for aggressive growth investments. Juniper has more to worry about as a large portion of its revenue comes from its routing division. For the third quarter of 2012, the company reported an overall flat revenue performance while its net income dropped by 20% on a year-over-year basis.

During 2012, Alcatel-Lucent closed a string of strategic deals that are expected to generate meaningful returns. Among many, the deal with Telefonica was a successful step towards gaining increased market penetration in the promising core router market. Telefonica is one of the first customers worldwide to use the award-winning 7590 XRS router. The firm will upgrade its IP networks, initially in Argentina and the Czech Republic, using Alcatel-Lucent's advanced technology.

In the switching market, Alcatel achieved a clear win over its peers. The firm was recently selected to replace more than 3,000 Cisco Catalyst Switches while upgrading 22 out of 23 of California State University's campus networks. In addition, the deal with China Mobile, the world's largest wireless operator, provides considerable competitive advantages. Alcatel-Lucent is poised to benefit from China's soaring demand for mobile broadband access. It will deploy the largest share of China Mobile's new TD-LTE trial network rollouts that will eventually cover 13 cities.

Looking ahead

Alcatel-Lucent carries a long tradition of consistent innovative solutions that prompted positive growth rates in the past. At the moment, this might not be enough to attract investors' interest. It is enough, though, to keep an eye on this stock. Currently, the stock is trading with 80% discount to sales and 15% discount to book value, indicating a possible value opportunity. EPS is expected to follow an uptrend suggesting a rewarding outcome for shareholders. Nonetheless, investor sentiment remains neutral as analysts' consensus recommendation indicates a “hold” rating. Looking ahead, the company needs to play its cards right and go “all in” in order to achieve a dynamic comeback. The successful completion of its restructuring process, solid control of its expenses, and strategic initiatives for positive cash flow are major components of a return to profitability. 


FaniKel has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems, Inc.. 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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