It might not be obvious to the casual observer, but today is a great time to sell your shares of Alcatel-Lucent (NYSE: ALU). Why?
Three reasons.
Source: Motley Fool CAPS.
Alcatel stock is coming off a bounce
Yahoo! Finance figures show that Alcatel stock has lost 21% of its value over the past year -- while the S&P 500 (^GSPC 0.02%) has gained 15%. On the face of it, that's pretty poor performance. Sell Alcatel now, and you might feel like you're selling "at the bottom."
But you're not.
It wasn't all that long ago that Alcatel stock was trading for as little as $2.36 a share. So at today's price of $3.18 per share, the stock is actually up 35% in less than a month. And the bad news?
This is probably as good as it's going to get, because...
Alcatel stock still costs too much
After its recent run-up, Alcatel stock looks a lot more expensive than the stocks of Cisco Systems (CSCO 0.06%) or Juniper Networks (JNPR -1.45%). Valued on analyst estimates of next year's earnings ("forward P/E"), for example, Alcatel costs more than either of its chief rivals.
Source: finviz.com.
And it gets worse. The above chart is based on what analysts (historically an optimistic group) are hoping these companies might earn. But valued on the profits these companies have actually earned over the past year -- "trailing P/E," or, as I've argued, the only P/E ratio that you can depend on -- Alcatel turns out to be even more overvalued. Whereas Cisco stock sells for a little under 17 times trailing earnings, and Juniper a bit less than 18, Alcatel currently has no P/E, because it has no "E" -- no earnings.
And that's the good news.
Alcatel stock doesn't pay you back
The bad news is that even the profits Alcatel isn't making probably overstate the company's profitability. Because the cold hard truth of the matter is that Alcatel-Lucent does a lousy job of generating cash profits for its shareholders -- and a great job burning cash.
To get a better understanding of just how bad a job Alcatel-Lucent is doing -- and how consistently badly it does it -- take a look at the below chart, which shows the "free cash flow yield" of a share of Alcatel stock over the past five years versus the same measures of profitability for its competitors.
ALU Free Cash Flow Yield (TTM) data by YCharts.
What this chart is telling you is that, when you take the market capitalization of a share of Alcatel stock (the price you pay to buy it) and divide this into Alcatel's free cash flow (the money the company tries to generate for you), the result is consistently negative.
Right now, for every dollar you invest in a share of Cisco, you can expect the company to generate more than eight cents of cash profit on that investment annually. Juniper will generate close to seven cents of free cash flow. But Alcatel stock... will burn about 7.8 cents (or more) of that dollar, year after year.
Suffice it to say that's not a very attractive prospect for new investors. And it's a great reason to use Alcatel's recent run-up to exit the stock.
