Alcatel Lucent: Undervalued By Almost Every Metric

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

With Alcatel-Lucent (NYSE: ALU) having lost about 70% of its value over the past six months, I decided to take a closer look into the company to see if it is now an attractive opportunity. Here are six points I looked at while researching ALU:

Valuation: ALU’s trailing 5-year valuation metrics suggest that the stock is undervalued. ALU’s current P/S ratio is 0.2 and it has averaged 0.5 over the past 5 years with a high of 1.6 and a low of 0.2. ALU’s P/B ratio is 0.8 and it has averaged 1.3 over the past 5 years with a low of 0.6 and a high of 2.4. ALU’s P/E ratio is 0.6 and it doesn’t have a recent P/E history as it has been not profitable.

Price Target: The consensus price target for the analysts who follow Alcatel is $2.90. That is upside of about 70% from where the stock is currently at. This suggests that ALU is undervalued at these levels.

Forward Valuation: ALU is currently trading at $1.80 a share and analysts expect the company to report EPS of $0.31 in 2012 for a forward P/E of 6. ALU’s revenues are expected to fall 2.8% next year. All of ALU’s comps are trading at higher multiples. Cisco (NASDAQ: CSCO), currently at $19.15 per share with analysts expecting EPS of $1.93, trades at a forward P/E of 10. Revenues are expected to jump 6.2% for the tech giant. Ericsson (NASDAQ: ERIC) is at $9.81 per share and analysts expect EPS of $0.93 for the company next year for a forward P/E of about 11. Revenues are expected to jump 3.4% for the company in 2012. Nokia (NYSE: NOK), currently at $5.31 with analysts expecting EPS of $0.33, is trading at a forward P/E of 16. This suggests that ALU is very undervalued as it is trading at a 40% discount to the cheapest company in the group.

Earnings Estimates: ALU has beaten EPS estimates the past four quarters and the beats ranged between 3 cents to 6 cents. This suggests that analysts do not have a good grasp on the company so upside surprises may lead to share appreciation for the stock.

Price Action: The first half of last year was positive for the stock as it rose from $3.25 to more than $6.50 a share for a two-bagger. The last six months though have been a totally different story for ALU. The stock has lost roughly 70% of its value over the time period. ALU just set new 52 week lows in December of less than $1.50 a share. It has since bounced though, and climbed all the way to $1.80 a share. The stock also just crossed above its 50 day moving average, which sits at about $1.75. Resistance on the upside includes $2.00 followed by $2.25. Support lies at about $1.50 and then followed by about $1.30, the 52 week low. 

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Conclusion: ALU looks undervalued on every metric. The stock performance also shows the negative sentiment of the market to the stock. The company definitely deserves a closer look at these very cheap levels. However, it may be too little too late for ALU as Cisco continues to dominate networking products that is full of large competitors. ALU has also had trouble generating cash flow and only generated cash flow from operations just once in the past four fiscal years. 

The Motley Fool has the following options: long JAN 2012 $15.00 calls on Cisco Systems and short JAN 2012 $20.00 calls on Cisco Systems. Vatalyst 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.

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