Alcatel-Lucent Eyes Another Major Win With This Potential Move

Alcatel-Lucent’s possible sale of its networking equipment business is a great idea for this turnaround story.

Jan 14, 2014 at 8:00PM

Over the last several years, tech investors have been privy to a number of impressive turnarounds. Struggling names like Nokia and Hewlett-Packard jump immediately to mind as once-hated stocks that have turned into home-run investments over the last year or so.

And while it might not have the same immediate recognition of the above companies, shares of struggling French-American communications giant Alcatel-Lucent have actually blown these better-known comeback stories out of the water over the past year.

ALU Chart

ALU data by YCharts.

And thankfully for its investors, Alcatel-Lucent's once again recently made headlines as it continues its ongoing, multi-year turnaround story. And if these reports turn out to be true, Alcatel-Lucent shareholders should certainly be encouraged by the ongoing progress at Alcatel.

Getting better all the time
According to reports from Bloomberg, Alcatel-Lucent is in the midst of accepting bids for a possible sale of its troubled enterprise unit, which would be great news for a whole host of reasons.

For starters, divesting its enterprise unit would allow Alcatel to exit what's a relatively unattractive business. In its most recently reported fiscal year, Alcatel-Lucent's enterprise business generated an operating loss of 12 million euros (roughly $16 million) in FY 2012 on revenue of 764 million euros (roughly $1 billion). Removing this business from its folds would help Alcatel-Lucent achieve its dual goals of exiting unprofitable businesses while also generating spare cash to help shore up its gradually improving balance sheet.

This storyline fits within the larger context of Alcatel-Lucent and its new management, which is going to great lengths to transform its business into a company that can be sustainably profitable over the long term. Alcatel's CEO Michel Combes is on record as targeting at least 1 billion euros in proceeds from asset sales or divestitures by 2015. A sale of its ailing enterprise business would go a long way toward achieving this goal for Alcatel.

Thankfully for Alcatel investors, it appears that interest is somewhat strong for the remainder of its enterprise business, which it has been selling off in pieces since 2011. According to the report, there are at least four potential bidders for Alcatel's enterprise unit, including German industrial powerhouse Siemens.

The outlook at Alcatel
With these kinds of gradual improvements continuing to take place, Alcatel-Lucent is on pace to see what could be its first year of overall profitability since 2011, although it's worth noting the 2011 profit was largely the result of exercising a previously existing tax-loss credit. 

In the year ahead, analysts are calling for Alcatel to generate a normalized EPS profit of $0.06 on slightly increasing revenue. Although in GAAP terms, Alcatel is still expecting a loss of about $0.07 per share. However, there's no question the company still has significant room for improvement in the years to come.

On top of its profitability issues, leverage presents another significant issue for Alcatel. Currently, its debt-to-equity ratio sits around 260%, and the company's interest coverage ration dipped below 1 times after accounting for capital expenditures in its most recent quarter. However, it's worth keeping in mind the monumental improvement this represents from the years of gaping losses that have riddled Alcatel. The kind of changes taking place at Alcatel take years, not months, to fully enact.

Either way, the possibility for Alcatel to discard its challenged enterprise unit would be an undeniable win for the telecom giant. Whether or not Alcatel's shares can continue to generate their outsized past performance is much less clear.

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Fool contributor Andrew Tonner has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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