Is Alcatel-Lucent Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Alcatel-Lucent (NYSE: ALU  ) fit the bill? Let's take a look at what recent results tell us about its potential for future gains.

What we're looking for
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: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?

What the numbers tell you
Now, let's take a look at Alcatel's key statistics:

ALU Total Return Price Chart

ALU Total Return Price data by YCharts.

Criteria

3-Year* Change

Grade

Revenue growth > 30%

(5.8%)

Fail

Improving profit margin

(244.1%)

Fail

Free cash flow growth > Net income growth

(234.1%) vs. (224%)

Fail

Improving EPS

(221.3%)

Fail

Stock growth (+ 15%) < EPS growth

42.3% vs. (221.3%)

Fail

Source: YCharts. *Period begins at end of Q2 2010.

ALU Return on Equity Chart

ALU Return on Equity data by YCharts.

Criteria

3-Year* Change

Grade

Improving return on equity

(356.9%)

Fail

Declining debt to equity

100.8%

Fail

Source: YCharts. *Period begins at end of Q2 2010.

How we got here and where we're going
Things don't look good for Alcatel-Lucent in its second assessment, as this telecom equipment supplier has lost all five of the passing grades it earned last year to fall into a zero-for-seven hole. Nothing has gone right lately for Alcatel, which has suffered from weaker revenue, crushed income and free cash flow levels, and rising debt. What can this company do to return to the position of strength it held last year? Let's dig a little deeper to find out what Alcatel is doing to improve.

Over the past few quarters, major telecom carriers have cut spending on network equipment due to difficult conditions in the industry, especially in 2G and 3G segments. As a result, Alcatel CEO Michael Combes recently announced a "Shift Plan," speeding up the company's restructuring efforts. Fool contributor Tim Brugger notes that Alcatel intends to reallocate its research and development resources toward cloud, networking, and broadband access technologies and services. The company also plans to cut 10,000 jobs, which could result in cost savings of more than $1.4 billion by the end of 2015. That hasn't been enough to stave off declining margins, which forced Alcatel to secure $2.1 billion in financing to meet its short-term obligations -- hence the big increase in debt-to-equity.

Going forward, Alcatel-Lucent should be poised to benefit from the increasing demand for LTE networks around the world. Alcatel recently won a contract from Telefonica to deploy 8,000 4G LTE stand-alone base stations on its existing 3G network in Spain. Fool contributor Rich Smith notes that Alcatel also finished testing a fiber-optic line for SaskTel in Canada. It will also provide 13% of a $3.3 billion supply contract for base stations to China Mobile, the world's largest telecom by subscribers. The company's new lightRadio technology, which improves network capacity by up to 70% on both Wi-Fi and cellular services, could be a major component of these new deployments.

Fool contributor Brian Nichols notes that Nokia (NYSE: NOK  ) recently began considering the possibility of acquiring Alcatel's wireless division after divesting its mobile handset business. However, divestiture of its wireless business could adversely impact Alcatel's relationships with AT&T (NYSE: T  ) , Sprint, and Verizon, which combined to account for more than 30% of its total revenue in the latest quarter and which have all been pushing hard to upgrade their cellular capabilities across the country. A sale to Nokia now would help replenish the coffers, but it would also force Alcatel to refocus on parts of its technology portfolio, like routing and connectivity services, where it would be an upstart in a fiercely competitive arena with far lower capital-based barriers to entry.

In an effort to save costs, Alcatel has also shifted the production of network processors in-house. Alcatel and Qualcomm have recently agreed to invest $132 million in the development of small-cell technology, which can boost wireless data capabilities in high-traffic areas. Fool contributor Chris Neiger points out that AT&T has been ramping up deployment of small-cell stations within its network, and the telecom leader estimates that the small-cell industry is expected to reach $2 billion by 2016. That's about a seventh of Alcatel's trailing 12-month revenue, so it won't be enough to offset a wholesale shift away from wireless products.

Putting the pieces together
Today, Alcatel-Lucent has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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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 October 28, 2013, at 8:00 AM, ghstflame wrote:

    See you at $10, not sure of the conclusion of article, seemed vague to me, but fool has been hounding ALU and RAD only to have them both triple this year so far.

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