When a stock is priced in the single-digits, it's possible that amateur investors could be sucked into the idea that a low priced stock is a good value. However, the fact that investors can buy 1000 shares of Alcatel-Lucent (NYSE:ALU) or around 160 shares of Juniper Networks (NYSE:JNPR) has nothing to do with the true value of each company. As Peter Lynch once said, just because a stock is down doesn't mean it can't go lower. Unfortunately for Alcatel-Lucent, there are three reasons to believe this stock could go lower.
Shares are down, but this number is way up
Alcatel-Lucent is down more than 10% since the beginning of 2014. Though the last year has been decent for investors, long-term investors are down more than 75% from where the stock was ten years ago. To be blunt, it's been difficult to invest in several of the network equipment makers over the long-term.
Juniper Networks investors have been rewarded with nearly the same price today as ten years ago, and Nokia (NYSE:NOK) investors could be sitting on a loss of greater than 65% based on ten years ago prices. The bottom line is, if there is an ideal situation where companies could be repurchasing their shares to the benefit of future returns, this is a classic example of an opportunity.
Unfortunately, due to cash flow issues and other factors, of the three companies we've mentioned only Juniper has been retiring shares. In fact, Juniper has retired more than 3% of its shares. By comparison, Nokia has increased its share count by more than 6%, but Alcatel-Lucent wins the prize with a more than 15% increase in diluted shares on a year-over-year basis.
With such a significant increase in diluted shares, and the prospect of more share issuances to come, Alcatel-Lucent investors have a right to worry about the future of their shares.
Huge earnings growth from where?
The average analyst expects Alcatel-Lucent to grow earnings at a 100% annual rate over the next few years. While Juniper and Nokia are both expected to post significant earnings growth over the next few years, there are significant differences in each company's operating results.
Of the three companies, only Juniper is reporting consistent growth today. The company's routing, switching, and services businesses make up the majority of its revenue and each division is growing. Alcatel-Lucent is in a different situation completely. On a geographic basis, the company reported that only its Asia-Pacific division reported revenue growth, and that made up less than 17% of the company's total.
Nokia is in a much more troubling situation than the rest. The company gets nearly 90% of revenue from its Networks division and sales were down 17% on a year-over-year basis. The point is, of these three companies, Alcatel-Lucent is doing better than Nokia, but that's not saying much.
Let's get to the bottom of this
If investors are looking for a simple bottom-line analysis, the conclusion is hard to avoid. Juniper Networks is the only one of the three to offer a yield, expected earnings growth, and positive free cash flow. In fact, looking at Juniper's core free cash flow (net income + depreciation – CapEx) compared to the company's revenue is particularly revealing.
Juniper generated $0.19 of core free cash flow per dollar of sales. Nokia produced 70% less core free cash flow per dollar of sales, and Alcatel-Lucent is still reporting negative free cash flow. In fact, this is one of the biggest challenges to Alcatel-Lucent's stock price appreciating in the future.
The company has already increased its share count significantly compared to last year and Alcatel-Lucent shows weakness in sales except for in one area of the world. If the Asia-Pacific region made up 50% of the company's revenue, huge growth in the future might be believable. However, this region makes up a small percentage of the company's revenue stream.
Maybe the most disconcerting is Alcatel-Lucent believes it won't be free cash flow positive until 2015. To continue investing for the future, the company will likely either have to issue more stock, take on more debt, or both. The bottom line is, Juniper offers a better profile for investors today and as long as that's the case, it's hard to justify a rise in Alcatel-Lucent's share price.
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Chad Henage 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.