Why Alcatel-Lucent Might Be Due for a Drop

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Alcatel-Lucent (UNKNOWN:ALU.DL) closed down 1.8% yesterday after Raymond James downgraded the communication equipment company from strong buy to market perform.

So what: Despite the downgrade, analyst Simon Leopold thinks Alcatel's assets are worth about $4.50 per share, suggesting that it trades at about a 15% discount to its break-up value. The problem for Leopold is that meaningful asset sales aren't exactly a lock, and based on Alcatel's actual earnings power, the stock looks more than fairly valued.

Now what: While the sale of Alcatel's wireless division would be accretive, Raymond James thinks the risks surrounding such a move are significant. "[W]e point out that a potential divestiture of the Wireless business could adversely impact Alcatel-Lucent's relationships with its largest customers AT&T, Sprint, and Verizon," noted Raymond James. "These three customers represent the majority of the wireless revenue and recently have accounted for over 30% of revenue." With the stock up a staggering 330% over its 52-week lows and trading at a price-to-book of almost 5, I'd agree that the downside associated with Alcatel's options are largely being overlooked by investors.