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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

The artist formerly known as "Alcatel"
Well, it was fun while it lasted. Last month, Alcatel-Lucent (NYSE: ALU  ) shareholders partied like it was 1999 (again), celebrating an abrupt volte-face by the stock junkies at Jefferies. Formerly bearish on the shares, an analyst had turned suddenly sunny on the stock, arguing that "increased EVDO software sales into CDMA operators" Verizon (NYSE: VZ  ) , Sprint Nextel (NYSE: S  ) , US Cellular, and Leap Wireless (Nasdaq: LEAP  ) would push Alcatel sales up 62% over 2009's sales.

If only that were true. But instead, writes a more bearish Bernstein this week: Alcatel's performance "isn't reassuring." In the face of a "booming" telecom equipment market in America, Alcatel has grown its sales just 10% year-to-date. Meanwhile, competitor Ericsson's (Nasdaq: ERIC  ) U.S. sales are up 91%, and Alcatel "has lost share on many fronts." Globally, Alcatel is trending down 6% by sales so far this year, versus strong sales gains at Ciena (Nasdaq: CIEN  ) and Cisco (Nasdaq: CSCO  ) , and Alcatel remains woefully incapable of turning a profit on its business.

Admitting to growing and very "real worries" about the company, Bernstein took a U-turn yesterday, driving away from Jefferies' bull run on Alcatel and downgrading the shares to "underperform" (aka "sell"). I agree.

Let's go to the tape
Why? Well, for one thing, because thanks to CAPS, and the record it keeps of these analysts' past picks, I happen to know that Bernstein is a much brighter analyst than Jefferies. It gets the majority of its picks right, for one thing, while Jefferies guesses wrong more often than not.

But really, the main reason I'm siding with Bernstein today is that the numbers demand it: According to Bernstein, there are a couple of really bad trends evident at Alcatel.

Where's the cash, Alcatel?
For one, "cash generation potential" is "weak." Over the past 12 months, Alcatel burned through $73 million in free cash flow. It lost nearly $12 billion over the past five years. According to Bernstein, considering the costs Alcatel carries, the company's unlikely to generate positive free cash flow at anything under a 4% operating margin -- and right now, the best Alcatel seems able to manage is 0.3%.

All I see here is debt
But if Alcatel lacks for free cash flow, it's got one thing in abundance: debt. Bernstein warns that once you subtract cash Alcatel needs to fund its operations, more cash needed to refinance a convertible debt offering that comes due Jan. 1, and even more cash earmarked for restructuring the company's struggling operations, there's less than $2 billion on Alcatel's balance sheet that's left available for productive purposes.

Against that, Alcatel carries $6.75 billion in debt, a figure Bernstein says will leave Alcatel "with debt over 3x EBITDA," and make it difficult for the company to obtain any extra financing it needs if it's unable to maintain its "cash pile."

Put these two concerns together, and what do you get? A heavily leveraged company, which while it has cash on hand, has most of that cash spoken for already. A desperate debtor who needs to maintain its cash collateral to allay creditor concerns -- even as this cash dwindles away, for lack of free cash flow to replenish it.

Prince called ... and he's invoking copyright
For Alcatel shareholders, the party that was 1999 ended years ago. Today, I fear the most they can hope for is a pity party.

Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 674 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Sprint Nextel is a Motley Fool Inside Value pick. The Fool has written calls (Bull Call Spread) on Cisco Systems.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2010, at 10:39 AM, DanTheMan1984 wrote:

    It's Amazing you bash a stock that you dont even own...This is a boring blah blah mumbo jumbo article that has no factual infomation. Fact is in the last Quarter Alcatel beat the street by 3 cents...Facts are there is a component shortage problem thats affecting Ericsson too...If Ericsson is such a great stock why like Alcatel is it down a ton from its 99 heights? As far as Debt goes Alcatel has a smuch cash and short term investments equaled to there long term debt...You cant say that about Wal-Mart who has 11 billion in short term cash and investments and 40 or so billion in long term debt...Maybe you should write about that instead. It seems like you know liitle about the market...I thnk your bashing ALU because you know its a turn around story and your telling people to sell so you can buy in cheaper isnt that right? After all lately more and more institutional and mutual funds have been adding this stock....FACTS.

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