Alcatel-Lucent Stock Soared 225% in 2013. Here's Why.

Telecom equipment manufacturer Alcatel-Lucent (NYSE: ALU) has had an enviable performance in 2013, with the stock more than tripling as a long-awaited rebound in business conditions finally appears to be falling into place. Yet even with its big gains, Alcatel-Lucent still faces stiff competition from Nokia (NOK 1.05%), Ericsson (ERIC 1.01%), and Cisco Systems (CSCO 0.71%), all of which are working hard to try to make the most of their opportunities in a rapidly changing industry. Let's take a closer look at Alcatel-Lucent to discover why it did so well and whether it can sustain its gains in 2014 and beyond.

Alcatel-Lucent's Murray Hill facility. Source: Wikimedia Commons.

What sent Alcatel-Lucent soaring?
Coming into the year, the bullish case for Alcatel-Lucent involved having the the company fix its biggest problems and start operating more efficiently. As CEO Ben Verwaayen explained late last year, the goal of producing stronger margins, emphasizing research and development, and getting itself healthier financially was intended to help Alcatel-Lucent focus on overall improvement, and the company executed on that goal reasonably well during 2013.

Some of those measures were painful, as the company said in October that it would cut 10,000 jobs by the end of 2015 as part of a strategic shift away from general IT equipment toward specializing in cloud, broadband, and IP networking. Yet positive moves also sent the stock upward, including Alcatel-Lucent's partnership with Qualcomm to work on small-cell wireless technology in an effort to boost wireless network efficiency and throughput. Just the willingness of Qualcomm to work with Alcatel-Lucent bolstered confidence in the stock, creating a further potential competitive advantage against Ericsson and Nokia.

Another big driver for Alcatel-Lucent stock was a big boost in merger and acquisition activity in the sector. Microsoft's purchase of Nokia's mobile-device division leaves Nokia more focused on telecom equipment, but it also raised attention to the profit potential in the space. Moreover, with Vodafone sitting on a huge cash pile after selling off its interest in Verizon Wireless, Alcatel could be the beneficiary of capital spending in Europe as the continent starts to emerge from recession.

Alcatel-Lucent Total Return Price data by YCharts

Yet one thing investors need to remember is that it wasn't that long ago that Alcatel-Lucent was struggling for its financial life. It took a $2.1 billion capital infusion from Goldman Sachs and Credit Suisse to help the telecom-equipment maker bridge the gap between its efforts to improve its business and the time at which it can become consistently profitable. Even now, the rate at which Alcatel-Lucent is burning cash is much worse than Nokia, which has made big gains in the free-cash-flow department recently.

Moreover, Alcatel-Lucent still hasn't followed through with a transformation of its corporate structure, as many investors have expected. Especially in light of Nokia's move, Alcatel-Lucent needs to figure out which areas it truly wants to emphasize if it expects to compete effectively against giant Cisco and other players in the industry.

Stats on Alcatel-Lucent

Source: S&P Capital IQ.

What's next for Alcatel-Lucent?
For Alcatel-Lucent, the future could involve moving in any of a number of different directions. Strategic divestitures that would follow in the footsteps of Nokia's Microsoft deal could help Alcatel-Lucent focus more narrowly on whatever it decides are its core opportunities for profitable growth. Yet reported efforts to sell its submarine-cable business haven't resulted in a cash-raising deal. Nokia also hasn't followed through after rumors that it might seek to buy part or all of Alcatel-Lucent's operations.

Alcatel-Lucent has seen the easiest part of its gains during 2013, but now, the company will have to work hard in order to keep its momentum. Gains in router sales and wireless-related revenue are an encouraging first sign. If the company can remain diligent in maximizing efficiency, it stands a good chance of sharing the rewards if telecom spending climbs in 2014 and beyond.

Click here to add Alcatel-Lucent to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.