The Search for Value in Communication Equipment Stocks

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

There was a time when communicating with other human beings involved actually being around them. But those days are long gone, and today we depend on technology to let us interact with others. But beyond the marketing aspect of communications (like hearing endless debates about which smartphone is the best), I have to wonder if there's anything really different about the various companies that make communication equipment. Time to find out! Let's look at a few players in the industry and hope we can find a good deal on an awesome investment.

Alcatel-Lucent (NYSE: ALU) is a stalwart in communications. They're part of the Dow Jones Sustainability Index, hold tens of thousands of patents, and boast more than half a dozen Nobel prizes among their Bell Labs employees. I like that Alcatel-Lucent is a fairly small company at under a $4 billion market cap, and that they aren't wasting their growth potential by paying a dividend. As a reasonably young company, I'm not super-pleased that they're only pulling a 6% profit margin. However, considering that Alcatel-Lucent serves 130 countries and is an essential part of the world's communications infrastructure, the fact that it's trading for .9 times its book value and 3.5 times earnings sounds like a slam dunk on the value end. The only issues I'm seeing that might make a person hesitant about buying into the company are that they deal in Euros (I'm bullish on Europe, but a lot of people worry about the EU economy and its future) and the fact that Alcatel-Lucent keeps filing lawsuits about its intellectual property and not getting any traction in court.

Exelis (NYSE: XLS) is a fairly diversified communications and tech company that spun off from formerly massive conglomerate ITT. Making everything from air traffic control technology and signal jammers that disable explosives to GPS, data encryption and night vision goggles, Exelis has a lock on a lot of important military and civilian hardware. Another small company, Exelis still manages to pay a 3.5% dividend. While it troubles me a bit that a small company would be paying so much and thus hampering its own growth, what worries me more is that Exelis is only carrying 5.5% trailing profit margins. However, those might be the reasons why the company is only trading for around 7 times earnings and 1.9 times its book value. If the company isn't valuing its government, military and other manufacturing contracts for their face value, that could actually underpin a superior deal. This is kind of exciting, actually. I might add this little gem to my portfolio.

I like networking, and ADTRAN (NASDAQ: ADTN) has got it goin' on. This is one of the companies that make that Internet possible, and I'm all for that. I also respect the company's 11.3% profit margins and like that they pay a dividend -- sort of like using the Net as a toll bridge. But is ADTRAN a good deal? I've got no problem with an infrastructure company trading at 1.9 times its book value, but I have to be concerned about the rather mediocre 17.77 P/E ratio. Granted that that's "normal" right now in the market, but I'm not looking for normal. I'm looking for a bargain, and I can't call ADTRAN a bargain. This isn't 2006 anymore, and the company isn't growing like it used to. I like maturity, but I also like cheap -- so for now I'll pass.

I'm ambivalent about wireless devices. Something tells me they'll get into serious trouble one of these days because of all that crazy radiation. But my foil hat notwithstanding, Qualcomm (NASDAQ: QCOM) is doing exceptionally well for itself in the semiconductor aspect of wireless communications. For a large company their profits are an exquisite 31.9%, and the dividend is a reasonable 1.6%. But again I find myself pausing when I ask if this is a good deal. Granted, I like mature and highly profitable companies. But the market already knows Qualcomm very well, and values the company at 18.26 times earnings and 3.3 times book value. For a manufacturer that's a little pricey for me, particularly with how much wireless communications have changed into a battle of trends lately. I'd like Qualcomm a lot more if I could catch it in a substantial dip, but until then it's just a good company you can buy without getting ripped off. You can do better.

There are some surprises in the communications equipment industry. One of them is that often the smaller companies are better deals. Fortunately, there are a lot of solid buys if you're not as concerned about costs as I am.

pongun has no position in any stocks mentioned. The Motley Fool owns shares of Qualcomm. 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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