June 27, 2012
Alcatel Lucent (NYSE: ALU ) may look like a tremendous bargain after share prices plunged 75% since last July, but sometimes you get exactly what you pay for. Here are three reasons to stay away from this stock today.
1. Shaky accounts
Analyst firm Bernstein warns that Alcatel might default on its loan obligations unless gross margins improve dramatically. That's a scary idea, as loan defaults often go hand in hand with bankruptcy. And it doesn't help that Alcatel's 10% market share in telecom equipment lags behind Ericsson (Nasdaq: ERIC ) and Nokia (NYSE: NOK ) , which have 40% and 20%, respectively. The company doesn't have much pricing leverage from this position.
2. Skeptical investors
The Wall Street Journal called Alcatel's recent shareholder meeting "raucous," as shareholders questioned key points of the company's strategy. CEO Ben Verwaayen's cost-cutting efforts haven't delivered the cash profits he promised four years ago, and Alcatel seems vulnerable to heavy competition.
3. Cash bleed
The company has been burning cash like crazy for years, despite Verwaayen's cost controls. This chart speaks volumes about Alcatel's cash problems. Burning cash at an annual clip between $500 million and $1 billion typically has a negative impact on financial performance. It's charts like this that make Alcatel's share price slide seem firmly grounded in reality.
ALU Free Cash Flow TTM data by YCharts.
None of this means that you should dump your Alcatel shares and run for cover right now, but it's food for thought and a good starting point for further research. Digital video, mobile networking, and the big data trend may combine to bring Alcatel back on its feet -- but it's hardly a sure thing. This free report will show you one stock that is a sure bet on Big Data, though.