Is Alcatel-Lucent the Perfect Stock?

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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Alcatel-Lucent (NYSE: ALU  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Alcatel-Lucent.

Factor What We Want to See Actual Pass or Fail?
Growth 5-year annual revenue growth > 15% 3.2% Fail
  1-year revenue growth > 12% (10.9%) Fail
Margins Gross margin > 35% 34.8% Fail
  Net margin > 15% (5.7%) Fail
Balance sheet Debt to equity < 50% 194.5% Fail
  Current ratio > 1.3 1.20 Fail
Opportunities Return on equity > 15% (25.7%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
  Total Score   0 out of 9

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Alcatel-Lucent had negative earnings during the period. Total score = number of passes.

On our 10-point scale, Alcatel-Lucent can't manage a single point. Sure, the networking space is competitive, but the fact that the company falls short on every key metric is still a surprise.

In some ways, Alcatel-Lucent's disappointingly slow growth is simply the result of a paradigm shift in the industry. During the past year, up-and-coming players like F5 Networks (Nasdaq: FFIV  ) and Finisar (Nasdaq: FNSR  ) have far outpaced bigger networking companies by targeting niche areas. That has hurt generalists such as Alcatel-Lucent.

But even among the top companies, Alcatel-Lucent falls short. Despite their own challenges, both Cisco Systems (Nasdaq: CSCO  ) and Juniper Networks (NYSE: JNPR  ) have seen stronger growth, have higher margins, and most importantly are consistently profitable. Teaming up with Hewlett-Packard (NYSE: HPQ  ) to go head-to-head with Cisco may make things more exciting for the company, but success is far from assured even with its telecom customers spending massive amounts on next generation networks.

Even though the networking space is a promising one for investors, Alcatel-Lucent has done little to distinguish itself. If you're looking for the perfect stock, you'd be better off looking elsewhere.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Alcatel-Lucent to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool Alpha has opened a short position on Juniper Networks, which is a Motley Fool Big Short short-sale recommendation. Motley Fool Alpha owns shares of Cisco Systems. The Fool has created a bull call spread position on Cisco. 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 Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (15)

Comments from our Foolish Readers

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 January 07, 2011, at 4:41 PM, mjh73 wrote:

    Absolutely agree fool! The only thing that is perfect about ALU is that it is a perfect short.

  • Report this Comment On January 11, 2011, at 5:42 PM, reallydumbfool wrote:

    Actually, I've been making a killing on ALU for years now. It's been bouncing betwen 2.50 and 3.00 for a while. Even the least bit of good news sends the stock up since all the bad stuff is already baked into the price. Just buy low and sell higher. Then repeat. This has let me earn, on average, nearly $500/wk just on this stock. If I had more money to play with, I'd be doing even better but I never buy on margin. Look, the fact is, this stock has been so battered for so long, it will shoot up a few cents on ANY positive news (company-related or industry-related). So if the Company beats its analysts expectations, which isn't hard to do, the stock inches up. Or if a competitors like Cisco does badly, ALU inches up, If there's good news in the telecom industry, AL inches up. The bar is really, really low, so the UPSIDE is ready to come buy. The trick is to sell ALU before it crashed back down and repeats the cycle of inching back up.

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