This Just In: Upgrades and Downgrades

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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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the worst ...
This has been a rather unappetizing year for investors in Franco-American telecom equipment giant Alcatel-Lucent (NYSE: ALU  ) . The stock's lost 38% of its market cap since the year began, and that's not even the bad news. The bad news is that according to one analyst, at least, the suffering has just begun. Yesterday, UBS announced it was downgrading Alcatel to Alca-sell, citing slowing growth in China and a shaky balance sheet as reasons for cutting the stock.

How bad could things get? According to the Swiss banker, Alcatel -- at $1.06 a share now -- could fall as low as $0.78 per share, losing another quarter of its already depleted market cap over the course of the next 12 months.

Time to abandon ship?
So ... is this the endgame for Alcatel? Is it time for investors to cash in their chips, accept their losses, go home, and begin licking their wounds?

Sadly, yes.

Here's the deal, folks. As I explained last month, Alcatel is between a rock and a hard place. After giving investors a brief glimmer of hope late last year, Alcatel quickly reverted to its cash-burning ways in 2012. The company still has about $200 million in cash-net-of-debt, but if Alcatel keeps burning the stuff at its recent rate (about $470 million per year), then within six months we could see the company "go negative." It will still have upwards of $6 billion cash at its disposal -- but it will have even more debt than cash.

Alcatel's taking steps to mitigate the damage, and it hopes to cut its costs by $1.6 billion annually through a combination of management shuffling and corporate restructuring, but Alcatel has been talking about cutting costs for years, and so far it's been unable to stop the flow of red ink. What the company really needs to complete a turnaround, of course, is a revival in the telecom market.

iPhone to the rescue?
Many investors believe (hope?) that the advent of Apple's (Nasdaq: AAPL  ) new LTE-compliant iPhone5, and related LTE devices, will be the factor that saves Alcatel. As more phone customers avail themselves of the iPhone5's higher network speeds, so the thinking goes, Sprint Nextel (NYSE: S  ) , Verizon (NYSE: VZ  ) , and AT&T (NYSE: T  ) will all have to up their capital spending to support the additional data usage.

Problem is, it's not working out that way. Verizon spent 17% less on infrastructure buildout in the first six months of 2012 than it did in H1 2011. It recently confirmed that H2 of this year won't make up the difference, with full-year capex spending continuing to lag what it spent in 2011. And Verizon's failure to spend may have a knock-on effect throughout the industry -- the opposite of starting an arms race in upgrades, Verizon's go-slow approach could lessen pressure on its rivals to up their own spending.

Compounding the lack of urgency, The Wall Street Journal recently observed that AT&T could soon find itself "the largest spectrum owner among major U.S. wireless companies ... by a large margin." This, too, argues against the idea that the company feels itself under pressure to spend more on telecom equipment.

Alcatel rides the roller coaster
Now, make no mistake: Capital spending on telecom is a cyclical industry. The longer the telcos delay building out their networks, the greater the pent-up demand for such investment will become. Phone usage is only going to grow over time, and data consumption and demand for faster speeds with it. Ultimately, the money will flow, and telecom equipment makers like Alcatel and its rivals will benefit.

They'll benefit, that is, if they survive the bad times, and stick around. The problem with Alcatel is that that with no money coming in the door, and the debt collectors starting to knock at the door, it may not be here to enjoy the good times when they come 'round again.

Want to learn more about how Apple is shaping the telecom equipment industry to its liking, and making companies like Alcatel dance to its iPods? Our analysts recently prepped a detailed report on Apple's prospects, and you can read it here today.

Fool contributor Rich Smith is neither long nor short any stock named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 274 out of more than 180,000 members.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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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 October 04, 2012, at 11:28 PM, retiredR wrote:

    This may bleed most everyone out of thier stock before a few investors can hold on, but the turnaround when it comes will be ten fold.

    ALU is more than a small Company it is a world leader not to be wriiten off by a downgrade.

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