Lucent: Awakening From the Dead

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

Many of us are aware that Alcatel-Lucent (NYSE: ALU) recently obtained a $2.1 billion senior secured credit facility from Goldman Sachs and Credit Suisse.  Because of the magnitude of this event, I feel compelled to take a closer look at Alcatel-Lucent to determine whether this company is a sensible investment for either the short or long term. 

Didn’t Alcatel and Lucent Merge Way Back in 2006?

That was my first thought when I began researching Alcatel-Lucent.  I remember when these were two very hot tech companies.  This obviously isn’t the case anymore, because Alcatel-Lucent currently trades at a mere $1.35, less than 10% of its value at the time of the merger.  It looks like they took a very long time to rationalize overlaps, especially in optical and access.  Plus it appears as though this company is facing extreme obstacles and tough competition.     

So What Has This Company Been Up To?

For starters, it looks like the company has been reviewing all of its assets for potential exit or divestiture of non-core competencies for some time.  In 2007, for example, Alcatel-Lucent divested its satellite manufacturing & services, railway signaling, and mission-critical integration and services business to Thales.  More recently, in 2012, the company sold its Genesys call-center business to a private equity buyer.  If the company wants to be profitable, then these are the sorts of things that it must do. 

More broadly, Alcatel-Lucent is in the process of both restructuring and transforming its business.  The three mission essential objectives of Alcatel-Lucent’s plan are (1) to improve margins; (2) to improve innovation and to drive sales of next generation products and services; and (3) to strengthen its balance sheet.  In the end, Alcatel-Lucent will probably become a smaller, more agile – and most importantly – profitable company.

That translates to cutting 5,500 jobs, which should help save the company 1.25 billion euros in annual costs.  It also means that Alcatel-Lucent will manage its IP portfolio as a profit center, review and renegotiate many of its unprofitable service contracts, identify and leverage best practices, and implement a new go-to-market strategy.

Are There any Catalysts That Could Cause the Stock Price to Increase?

A key thing to remember is that Alcatel-Lucent usually finishes the year with a very back-end- loaded quarter.  In both 2010 and 2011, for example, the fourth quarter was the most profitable quarter by a landslide.  If the company is profitable by a wide margin at the end of this fiscal year, that could send this increasingly volatile stock soaring.   

Alcatel-Lucent should benefit from aggressive spending plans at AT&T (NYSE: T), a customer that represents a large portion of Alcatel-Lucent’s business.  Specifically, AT&T has stated that it plans to increase its capital spending over the next several years, as it expands its LTE coverage to 100% of the United States.  Alcatel-Lucent is a key player in that space.

What about the risks?

A significant risk is the unwieldy Franco-American operating structure and all of the dysfunction that seems to stem from it.  Add to that the confounding European regulations and you have a problem.  The major risk, however, is managing the transition from legacy network provider to next-generation network solutions provider. 

3 Reasons to Consider Purchasing Alcatel-Lucent

  1. Alcatel-Lucent will benefit from new business that it is receiving from China Mobile and AT&T.  The Chinese markets provide Alcatel-Lucent with the opportunity to grow alongside the world’s largest emerging market.  It is, however, unclear whether or not Alcatel-Lucent will book next-generation business quickly enough to make up for expiring legacy business.  On that note, if they can gain access to other customers in China, then they may have the chance to use China as a dumping ground for some of their legacy products.    
  2. Alcatel-Lucent is actively engaged in yet another restructuring program.  Although investors remain skeptical, it does appear that the company is implementing significant lessons learned from its previous efforts and that the company is focusing its efforts on sustaining profitability.  If this company can leverage this opportunity to strategically navigate some of the worker-friendly French labor laws, renegotiate some of its unprofitable contracts, and become a more agile company, it will be better positioned to respond to slowdowns in carrier spending and macroeconomic headwinds that impact IT and network spending worldwide.  
  3. The fact that a debt refinancing deal was completed between Alcatel-Lucent and two very respected companies (Goldman and Credit Suisse) will signal to the markets that Alcatel-Lucent’s turnaround plan is credible.  As a result, investors will see analysts raise target prices to around $2.50 - $3.00, which is nearly double what Lucent is trading at right now.  That may result in investors taking notice of this stock and it receiving a nice pop.      

 My Foolish Take

On the negative side, seven years after the merger Alcatel-Lucent has still not demonstrated that it can consistently turn a profit.  Furthermore, at its current share price the stock is off limits to a wide range of various investors.

On the positive side, Alcatel-Lucent stand to benefit from AT&T’s increased capital spending and new business that it is receiving from China mobile.  With cash & investments of around 5 billion euros and some love from Goldman Sachs and Credit Suisse, Alcatel-Lucent has bought a few more years to turn around its business – maybe the third time’s the charm (if the second time doesn’t work).

On balance, because of the intense competition that Alcatel-Lucent is facing and the perceived slow rate of execution of its turnaround plan, the majority of analysts are going to rate this stock a hold.  That is in spite of its significant potential upside.

RyanPeckyno 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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