In the following video, Motley Fool tech and telecom analyst Andrew Tonner tells investors how a recent line of financing from Goldman Sachs and Credit Suisse helped to boost shares of Alcatel-Lucent. With big finance firms still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal, or whether finance stocks are a screaming buy today. The answer depends on the company, so to help figure out whether Goldman Sachs is a buy today, I invite you to read our premium research report on the company today. Click here now for instant access!
Brendan Byrnes: Hey Fools, I'm Brendan Byrnes and I'm joined today by our Tech and Telecom Analyst for Fool.com, Andrew Tonner.
Andrew, let's talk about Alcatel-Lucent (UNKNOWN: ALU.DL ) . It's struggling. Actually the stock price has come up a little bit recently, but we have a new CEO coming in. Can he bring this company back?
Andrew Tonner: I think it depends on the chief executive, because we don't know exactly who it's going to be, but at the same time I do think it will be a positive for the company. We saw the market judge it as a potential positive, CEO Ben Verwaayen stepping down after four largely unsuccessful years at the company.
If you look at the company now, versus when he first took the helm, a lot of the initiatives that he claimed to be at the top of his agenda really haven't been fully achieved yet. For this company, from the beginning, the whole rationale for the merger between Alcatel and Lucent was cost efficiencies.
These companies, combining, would be able to eliminate overhead and help cushion margins because the space they operate in, telecom equipment, is just truly a brutal situation. The economics of the industry are really, really stacked against the smaller companies.
You see the companies basically like Huawei or an Ericsson (NASDAQ: ERIC ) as the companies at the top of the revenue food chain, who can eke out incrementally better margins, as the companies really positioned to last for the long term.
There's really a lot of uncertainty when you look at the Alcatel model and whether they'll be around, say, 10 years from now.
But you are right, we've seen the stock price rebound basically 60% off of its all-time low below $1 a share, on two-part news. The first, again, was that Alcatel won't be going bankrupt in the short term.
Brendan: That's good news, right?
Andrew: Yeah, exactly. They secured $2.1 billion in financing in a consortium led by Goldman Sachs (NYSE: GS ) and Credit Suisse. It helped them roll out their debt profile from three to six years now. It gives the company breathing room, but at the same time if you look at the inefficiencies with this company, their relative efficiency ratios versus the rest of the competition, they just don't stack up.
A new CEO can possibly come in, reinvigorate and execute on some of those cost cutting measures. Well, yes, maybe he can make a material impact, but at the same time this company has so much stacked against it, too, that even at a low share price I'm really not a fan of it over the long term.
There's this short-term noise that, yeah, potentially could be very positive, but if you try to predict what that will look like in five years it's extremely difficult for someone, as an analyst, so I'm staying away. I recommend the stock as a hold, basically on uncertainty.
Brendan: Right. Definitely keep an eye on whoever the new CEO is, whoever he or she may be, but it's something to watch for sure. A company ... a lot of struggles, especially going forward. We'll see how it works out.
Andrew, thank you for your time.