Profit from This Rebound
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Like Sprint-Nextel (NYSE: S), Alcatel-Lucent (NYSE: ALU) is still working its way through a counterproductive merger. Alcatel SA's $13 billion stock swap with Lucent Technologies in 2006 has not delivered as envisioned, much like Sprint's $35 billion purchase of Nextel in 2004. At present, the market capitalization for Alcatel-Lucent is around $2.6 billion while Sprint-Nextel's is about $10.96 billion, not even close to the acquisition costs for either deal.
As Anand Chokkavelu of Motley Fool wrote in "The 100 Things I've Learned in Investing," about these type transactions, "Mergers and acquisitions are overrated. Somewhere between 50% and 85% of mergers fail to boost value. The frequency of achieving promised "synergies" should be filed somewhere between unicorns and no-hitters."
Enter, stage right: the transactions that created both Sprint-Nextel and Alcatel-Lucent.
Finally, in 2011, Alcatel-Lucent returned to profitability. As a result, the share price rose from under $1.50 in December 2011 to over $2.50 in February of 2012. At present, the profit margin is 3.19%.
But Alcatel-Lucent recently issued guidance that earnings would plummet due to a weak demand for telecommunications goods and services as a result of the recession in Europe and reduced margins due to pricing competition from Asian firms such as Huawei Technologies and ZTE Corp. Alcatel-Lucent has fallen 26% in the last week of market action to where it is now trading at a two-decade low.
Even though it is losing money with a negative profit margin of 9.72%, Sprint-Nextel, by contrast, has soared by more than 55% for 2012. Much of that has to do with its partnership with Apple (NASDAQ: AAPL). Sprint-Nextel has invested itself heavily in every way possible in the success of the iPhone. When the iPhone 5 was not introduced last Fall, as expected, the share price of Sprint-Nextel was punished.
But sales growth and earnings-per-share growth are now both rising for Sprint-Nextel, due in no small part to the iPhone from Apple. This year, earnings-per-share growth has increased by 16.79%. Next year, earnings-per-share growth for Sprint-Nextel is projected to jump another 28.10%. The price-to-sales ratio for Sprint-Nextel is just 0.32%, which is very favorable. The market is valuing the share price of Sprint-Nextel at less than one-third of a dollar for its sales.
Alcatel-Lucent has much more favorable financials than Sprint-Nextel. The price-to-earnings growth ratio is very bullish at 0.55. The price-to-sales ratio is only 0.14 and the price-to-book ratio is just 0.48. The market is valuing the assets of Alcatel-Lucent at less than half book. Earnings-per-share growth this year for Alcatel-Lucent is soaring at 271.88%; and is expected to surge by another 29.41% for the next twelve months.
It appears as if the market is overreacting to the bearish forecast. While Alcatel-Lucent is based in France, only 30% of the company's income comes from the European Union. Alcatel-Lucent does business in more than 130 countries. It is also very strong in emerging markets, especially China. The partnership with China Telecom (NYSE: CHA) is particularly promising.
With China Telecom, Alcatel-Lucent recently launched "Broadband China." That is an effort to provide high-speed broadband connections to 250 million Chinese households. As a basis for comparison, the population of the United States is around 300 million individuals, not households.
Now trading around $1.10 a share, the mean analyst target price for Alcatel-Lucent over the next year of market action is $2.45. Over the last three months, the mean analyst rating for ALcate-Lucent has declined from 2.55 to 2.82 (1 is strong buy with 5 being strong sell). Alcatel-Lucent is down due to the reduced outlook and its being viewed as a European company by traders. These are mistakes the market is making in the short term that should yield profits to investors buying shares of Alcatel-Lucent for the long term.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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.