Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. This sort of stock offers sustainable gains, with improving financial metrics that support strong price growth. Let's take a look at what Alcatel-Lucent's
What the numbers tell you
The graphs you're about to see tell Alcatel's story, and we'll be grading the quality of that story in several ways.
Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company has become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Alcatel's free cash flow has grown in comparison to its net income.
A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Alcatel's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.
Is Alcatel managing its resources well? A company's return on equity should be improving, and its debt-to-equity ratio declining, if it's to earn our approval.
By the numbers
Now, let's take a look at Alcatel's key statistics:
ALU Total Return Price data by YCharts.
|
Criteria |
3-Year* Change |
Grade |
|---|---|---|
| Revenue growth > 30% | (15.2%) | Fail |
| Improving profit margin | 2,194% | Pass |
| Free cash flow growth > Net income growth | 113.8% vs. 129.4% | Fail |
| Improving EPS | 575% | Pass |
| Stock growth (+ 15%) < EPS growth | (55.7%) vs. 122% | Pass |
Source: YCharts. *Period begins at end of Q2 2009.
ALU Return on Equity data by YCharts.
|
Criteria |
3-Year* Change |
Grade |
|---|---|---|
| Improving return on equity | 159.9% | Pass |
| Declining debt to equity | (17.7%) | Pass |
Source: YCharts. *Period begins at end of Q2 2009.
How we got here and where we're going
Alcatel doesn't pay dividends, so our normal dividend evaluation is suspended. The company passes five of its seven remaining tests, which is a good showing for a company that's had such a rough go over the past few years.
Although its numbers have been trending positive, Alcatel's most recent earnings were much weaker than that trend, and the company may wind up losing a few of its passing grades if it can't diversify away from cratering Europe while simultaneously hacking its weighty costs down to a more manageable size.
Although Alcatel's well-known for its networking hardware, the company's attempting to be relevant in more diverse ways as the world connects to ever-more mobile devices. It teamed up with Telefonica
Alcatel's American hopes are pinned to Verizon's
That may not be enough. Alcatel's executive team is on the chopping block, along with 5,000 employees, as worldwide weakness could easily undo the company's fragile gains of recent quarters. An economic downturn would be devastating for Alcatel as the companies it depends on for capital spending all tighten their belts simultaneously.
Putting the pieces together
Alcatel has some of the qualities that make up a great stock, but no stock is truly perfect. These numbers are likely to change over time, so it's important to keep track of Alcatel's progress. The Fool is here to help. When you add Alcatel to your free personalized Watchlist, you'll get updates whenever we uncover any news you'll need.
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