Here's Why You Should Capitalize on Alcatel-Lucent’s Pullback

Alcatel shares have lost some ground this year, but this is a good thing. Let’s see why.

Apr 23, 2014 at 12:15PM

Telecommunications and networking equipment company Alcatel-Lucent's (NYSE:ALU) turnaround has lost steam this year. The French company is down 15% in 2014, despite posting impressive fourth-quarter results in February. However, Alcatel can get back on track thanks to aggressive cost reductions and weakness at Cisco (NASDAQ:CSCO). Let's take a look why investors should consider taking advantage of the recent weakness in Alcatel's share price.

A terrific turnaround
Alcatel-Lucent is turning around impressively. It posted a net profit of $182 million in the fourth quarter, down from a loss of $2.11 billion last year. The company's gross margin improved amid aggressive cost cutting to clock 34% in the fourth quarter. In comparison, analysts had expected a gross margin of 32% and an adjusted net loss. 

Through the Shift Plan, Alcatel expects further improvements in 2015 by focusing on cash generation and profitable growth. Also, Alcatel has been making some moves to strengthen its balance sheet. It has now restructured its debt to a large extent, while sales of non-core assets are also helping the company bolster the balance sheet.

Opportunities in the end-market
Alcatel is also targeting different growth areas such as network and cloud infrastructure. These two areas are interrelated, with networking in data centers becoming a key part of the infrastructure nowadays. Alcatel is looking to make the most of this market through its carrier-grade IP routing solutions. Next, the demand for ultra-broadband access is rising due to the proliferation of devices such as smartphones, tablets, and other connected devices. This is giving rise to more demand for networking equipment, opening up opportunity for Alcatel to grow its business.

On the other hand, Alcatel is seeing good growth in fiber and LTE technologies. These services are being adopted by both telcos and cable providers. Moreover, the adoption of passive optical networks by cable providers is also an encouraging factor since this market is expected to grow at a compounded annual growth rate of 3.56% until 2018, according to analysts.

Alcatel's IP routing business is also gaining steam, primarily driven by increasing capacity requirements in mobile networks with large LTE rollouts across the globe. This has enabled Alcatel to strengthen its position in edge routing and mobile backhaul. According to management, Alcatel is entering a new phase of expansion, led by ever-increasing capacity requirements and IP transformations.

Going forward, Alcatel is also looking to tap the market for software-defined networking, or SDN, through its Nuage venture. Nuage is aiming to develop an open, software-based solution to address key data center network constraints that limit cloud service adoption. A year ago, Nuage started pilot projects in Europe and North America, and so far it has done well by recording three commercial contracts. 

Alcatel also enjoys a solid position in terrestrial optics with its 1830 PSS solution present in 44 of the top 50 service providers worldwide. Further, Verizon has selected the Alcatel-Lucent 1830 Photonic Service Switch as a key element in its continuing move to an all-IP optical network for the U.S. 

Cisco's weakness is an advantage
Alcatel will be helped by Cisco's woes in the networking equipment industry. Cisco's struggles in emerging markets have continued after the NSA spying allegations last year. The networking company saw a strong decline of 12% in orders from emerging regions. Brazil and Russia were the biggest points of concern for Cisco, with orders from these countries dropping 25% and 30%, respectively. 

Moreover, Cisco expects growth in its core networking business to slow down, which is in stark contrast to Alcatel. The French company's core networking operating income more than tripled in the last fiscal year. Due to strength in both IP transport and the IP platform, Alcatel expects this trend to carry on in the future.

Bottom line
Alcatel's performance has not been sprightly this year. However, the company's underlying business is moving in the right direction and it is targeting meaningful improvements by 2015. So, you should consider capitalizing on the weakness in Alcatel's share price and consider adding more shares to their portfolio.

Alcatel's may not be, but are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers