Alcatel-Lucent: On Its Way to Being a Top Growth Stock in 2014?

Alcatel-Lucent expects to return to profitability by 2015.

May 22, 2014 at 12:05PM

Alcatel-Lucent (NYSE:ALU) has had a rough ride in the past few months. After nearly reaching $5 per share toward the end of 2013, it has been on a downward plunge ever since. But, the trend may turn around for the French-American manufacturer of underwater cables and wireless network equipment. In response to its less-than-stellar returns, Alcatel-Lucent has taken a hard look at its strategy and found ways to cut operating expenses. The new CEO, Michael Combes, has also announced plans to reallocate the company's resources into its more profitable divisions, while cutting areas operating at a loss.

Predictions for a profitable 2015
As a result of the revamped business strategy, Alcatel-Lucent expects to return to profitability by 2015. But, simply managing to cut its losses is not enough to inspire optimism in investors. What does Alcatel-Lucent have in the works that could actually point to a profitable 2015?

Part of the company's plan to cut losses involves selling off as much as $1.36 billion of unprofitable assets to fund the complete overhaul of its business strategy. Alcatel-Lucent will now focus on just two segments: core networks and access networks (which, when combined, account for as much as 98.6% of its sales).

Alcatel-Lucent and Nextgen
Alcatel-Lucent has recently confirmed a $100 million deal with NextGen to build a 2,000-kilometer underwater fiber optics cable between Darwin and Port Hedland, Australia. Work on the massive new fiber optics cable will begin this month and is expected to be finished by 2016.

The cable will be owned by NextGen, but will be based on technology developed by Alcatel-Lucent. The project is being funded by investments from Shell and Inpex, who want the cable in order to provide high-speed communication between data centers in Perth and their natural gas projects off the northwest coast of Australia.

This deal will provide some much-needed revenue for Alcatel-Lucent and help to secure its position as a leading innovator in undersea fiber optic cable technology.

Partnering with Nokia
Alcatel-Lucent's stock was up nearly 4% on May 5 amid rumors that Nokia (NYSE:NOK) was considering acquiring the French telecommunications technology firm. Such rumors have circulated before, and there is little evidence that the two companies are actually in talks about such a deal.

In a recent interview, CEO Michael Combes emphasized Alcatel-Lucent's commitment to cutting costs and restructuring its business strategy rather than on any industry consolidation deals. However, a deal with Nokia could ultimately be a smart move for both companies.

After the long, drawn-out deal with Microsoft (NASDAQ:MSFT) to sell of its handset division finally came to a close earlier this year, Nokia has the cash to make such an acquisition. With both Nokia and Alcatel-Lucent focusing on major revamping of their respective business strategies, a consolidation of their resources could ultimately lead to a stronger position in the future.

As both are relatively small companies in the telecommunications equipment market, which is becoming more competitive, the merger is seen by many experts as a strategic move for both companies.

Even while Microsoft moves further into the mobile and tablet markets, it is still a significant player in cloud services and networks (where both Alcatel-Lucent and Nokia seem to be moving). A partnership between these two lower-tier companies could give them a stronger foothold in the market, which could potentially become a challenge for Microsoft.

While a merger of Alcatel-Lucent and Nokia could be a strategic move for both companies, it is still unclear at this point whether such a deal is really on the table. In light of this uncertainty, cautious investors may want to hold off until more concrete news comes out regarding this potential merger.

Aside from these rumors, there is sure evidence that the company's three-year plan to cut operating expenses and restructure its business is starting to have a positive effect, and investors can look forward to further improvements in the coming months.

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Haris Qureshi has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. 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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