When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Alcatel-Lucent
The company is a networking and communications powerhouse, based in France and recently employing around 76,000 people. The stock is down about 75% over the past year, making some see it as a bargain -- and others see it as doomed.
Why might you want to buy into Alcatel-Lucent? Well, many of its numbers seem irresistible:
Its price-to-earnings ratio was recently 3. (Yes, 3!) Compare that with the S&P 500's P/E above 15.
The company's forward P/E, based on expected earnings in the coming year, is just 7, half of the S&P 500's forward P/E. Its price-to-book-value ratio was recently 0.7.
See? Tantalizingly cheap on paper.
A glance at some basic stats for Alcatel-Lucent will reveal some red flags. The company traces its roots back to the 1800s. Lucent used to be AT&T Technologies, and Alcatel-Lucent now houses the venerable Bell Labs research organization. Despite the firm's venerable reputation, Alcatel-Lucent's stock price has slid consistently toward $1.50 -- firmly in penny-stock territory -- and down sharply in the past few years. It was trading in the teens just five years ago and briefly in the $80s in 2000. A glance at the company's long-term stock price chart reveals a company experiencing serious trouble.
What exactly has gone wrong for the company? For one thing, the stock has been whipped around following various analyst upgrades and downgrades. While some lauded a big jump in earnings, that was coupled with a drop in revenue -- and top-line growth is vital if bottom-line growth is to grow consistently. The company did rack up some big sales to telecom companies, but some analysts expect that growth will slow after the big burst of sales. Deutsche Bank expressed concern that Alcatel's "high-margin CDMA business" in particular will be slowing.
Even more recently, analysts at Bernstein saw the company mired in "unattractive" wireless and enterprise segments, and their most positive view was that there doesn't seem to be an immediate risk of bankruptcy. That's not exactly the most promising position! Meanwhile, despite reporting profitability and earnings last year, Alcatel-Lucent was cash-flow negative to the tune of hundreds of millions of dollars.
Remember those exciting valuation numbers I shared above? Well, check out the company's price-to-cash-flow ratio, which was recently 23, twice the industry average and more than twice that of the S&P 500. This reveals that Alcatel-Lucent hasn't been a reliable producer of gobs of cash. (Its free-cash-flow has been improving lately, but it's largely still negative.)
Its recent performance isn't exactly auspicious, either. As former Fool writer Stephen Simpson has noted, "Across the board, Alcatel-Lucent's first quarter was filled with bad news" with revenue dropping 23%. During that same recent quarter, Ericsson and Juniper got a boost from Verizon orders, suggesting that perhaps Alcatel-Lucent, which has also been a major supplier to Verizon, is losing ground there. Simpson worries about strong competition in the 100G market from the likes of Ciena and Cisco Systems.
Despite all that, there is a buy-the-stock case that some are making. For one thing, though the company carries a decent amount of debt, it also sports a reasonable cash balance. Its balance sheet shouldn't keep you up at night. In a presentation reviewing the company's 2011 results, CEO Ben Verwaayen pointed to an improving balance sheet, and increased profitability since 2009. He stressed a commitment to "realize the full value of our patent portfolio" and stressed the strength of the company's innovative pipeline of technology in development.
Still, it's not unreasonable to decide to just hold off. You might want to just wait. You might wait for Alcatel-Lucent to report a series of uplifting quarters, featuring net gains, continued revenue and earnings growth, positive free cash flow, rising margins, and more. You might wait for the global economic recovery to have telecom carriers spending more, as Alcatel-Lucent should benefit from that.
I think I'll be holding off on Alcatel-Lucent, myself -- at least for now. After all, there are plenty of compelling stocks out there with less uncertain futures. For example, check out our special free report, "The Next Trillion-Dollar Revolution," to learn about a company poised to benefit from the explosive growth in mobile communications.