Foolish Forecast: Alcatel-Lucent, Together at Last

Are you ready, investors? For the first time ever, Alcatel and Lucent will be "married, filing jointly" as the less-than-elegantly-named Alcatel-Lucent (NYSE: ALU  ) . Q4 and full-year 2006 results are due out Friday.

What analysts say:

  • Buy, sell, or waffle? Thirty-five analysts follow the new Alcatel-Lucent. At last report, the conglomerate was getting 13 buy ratings, 13 more holds, and nine sells.
  • Revenues. On average, they're looking for 10% quarterly sales growth to $5.32 billion.
  • Earnings. Profits are predicted to fall 28% to $0.21 per share.

What management says:
Perhaps in a get-to-know-us gesture, Alcatel-Lucent (Actually, this is getting old ... maybe we can just call you "Al?") released a preliminary earnings report last month, a preview of what we'll be seeing on Friday. In that release, the firm advised that it expects to report $5.01 billion in revenues for the fourth quarter (about 6% shy of analyst estimates), and $155.2 million in operating profits (after subtracting $297.6 million for changes in accounting).

Restructuring and asset impairment charges of $1.03 billion will also be taken. I'm guessing those aren't included in the predicted operating profits, so that means the end result will be a "big bath" that starts Al off with a net loss for the quarter, and a good baseline number to compare its results to in the future.

What management does:
Take all these numbers with a few grains of salt. I'm sure the newly merged entity is still working some kinks out of its accounting, and indeed, it's going to be providing "pro forma" numbers in addition to its official results in Friday's news, to help investors better understand (i.e., "to spin" the results). That said, this is what Al's margin trends are looking like, based on the numbers it has publicized so far: Gross and net margins are both dropping; meanwhile, operating margins are bobbing, but holding more or less steady above 9%.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

36.3%

35.4%

35.4%

35.1%

34.6%

34.4%

Operating

8.6%

8.0%

9.1%

9.5%

9.6%

9.4%

Net

4.1%

4.6%

7.1%

6.7%

6.5%

5.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
I've got to admit, I get really nervous trying to make sense of a company's accounting in the wake of a major-league merger like this Alcatel-Lucent tie-up. The good news is that the nerves usually subside over time, as the picture of how the new-and-improved firm is doing begins to firm up.

Except it doesn't always work that way. Sometimes, a firm follows up a big merger with a big bath, and then a bunch of tiny baths (call 'em corporate sponge baths.) It appears that's the way Al is going to play things, too. According to CEO Patricia Russo, "Alcatel-Lucent has decided to take additional actions to further reduce its cost structure. Together with the initial cost synergies plan, we expect to achieve combined cost savings of at least Euro 600 million in full year 2007, which is Euro 200 million higher than our initial synergy target for 2007."

On the surface, that sounds both fine and dandy. But for investors, it poses a dilemma: "Additional actions" usually entail restructuring -- and restructuring costs, which far from letting the accounting settle into place, will further confuse the picture going forward. Long story short, Al's accounting is confusing today, will remain so on Friday, and could well get even more confusing in quarters yet to come. Tread warily.

Competitors:

At the risk of overloading you with even more numbers and data, here are a couple other pieces we've done recently on Al's constituent parts:

Fool contributor Rich Smith does not own shares of any company named above.


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