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2011: The Year Alcatel-Lucent Lost Its Mojo

In these waning days of 2011, there's a chill in the air and snow in the forecast. What better time of year to curl up by the fire and ponder: What went wrong with the stocks you picked back in January? What went right? And should you keep these stocks in your portfolio, or go out and find something new?

That's what we aim to do today, as we flip back the calendar, and consider the year that was at Alcatel-Lucent (NYSE: ALU  ) .

A few Foolish facts about Alcatel-Lucent

Year-to-Date Stock Return (48%)
P/E 6.9
Dividend Yield None
1-Year Revenue Growth (1.3%)
1-Year Profit Growth N/A*
CAPS Rating (out of 5) ***

Source: Motley Fool CAPS. *Negative earnings in comparison period.

What happened to Alcatel-Lucent this year?
After a lackluster 2010, in which its shares basically churned water for 12 months straight, Alcatel-Lucent bulls emerged from the drink and stampeded into 2011. Expectations for a strong revenue year were quickly rewarded, as the company stole march after march against archrival Cisco (Nasdaq: CSCO  ) , and racked up big sales to telecom clients AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) .

Fueling the fires -- an arms race in big telco to provide better service for smartphone users, and build out TV and Internet services in a market share grab aimed directly at Comcast (Nasdaq: CMCSA  ) and its brother cable providers. An arms merchant to the industry, Alcatel looked flush, reporting a 22% rise in Q4 (2010) revenues early on, and collecting a big endorsement from investment banker UBS. Starting just under $3 a stub in January, the shares swiftly doubled, topping $6.50 in early May.

Then came the crash. Around July, Wall Street began to question the Alcatel growth story. First Deutsche Bank reported that the stock's rise had already captured all potential value from positive developments, while the risk of slowing "revenue and margin momentum" was growing.

And let's give credit where it's due: Deutsche Bank was dead on the money. Alcatel just finished reporting a quarter in which earnings nearly septupled ... but revenues are floundering (down 7%), and as I've been pointing out for months, Alcatel's supposed earnings are entirely lacking in the kind of real free cash flow that would make them worth paying attention to.

Unless they get this problem fixed -- and soon -- 2012 could be the year investors stop talking about how Alcatel is fixing what was broken and begin talking about ... the risk it goes broke.

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Fool contributor Rich Smith does not own shares of, or short, any company named above. You can read about his other predictions, and find more of his recommendations on CAPS, where Rich is known as TMFDitty, currently ranked No. 343 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Cisco Systems. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (1) | Recommend This Article (7)

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 04, 2012, at 1:14 PM, diltondalton wrote:

    What happened to Alcatel didn't happen this year. It happened a decade ago.

    Alcatel used to be a conglomerate. But late in the internet bubble, it decided to become a telecommunications equipment supplier (perhaps assuming that no home should be without a terrabit ATM switch). It divested itself of most of its non-telecom businesses and bought a bunch of sort of related and often redundent companies, resulting in culture shock, financial losses and layoffs. But when the internet bubble burst, instead of retrenching and coming out strong, Alcatel merged with another money losing outfit named Lucent and let their less than competent CEO take the reins. Bad move. Since 2002, Alcatel-Lucent has marched steadily down the ladder of success. It has not kept up with the rest of the world and has seen creativity stiffled by bureaucracy. Many of its best people are gone. More layoffs are inevitable and it is likely that the company will either be taken over or be sold off in little bits. I don't think it can survive much more of its current management. Other companies like Cisco, who are in the same business, are growing. If you don't grow, the alterative is death and that is my prognosis for Alcatel Lucent unless they pull their thumb out and start being the leader they should be.

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