Alcatel-Lucent (NYSE:ALU) shares have fallen nearly 20% in 2014 after staging one of its best years in the last decade during 2013. However, this poor performance doesn't mean the company is a sell. In fact, considering peers Cisco (NASDAQ:CSCO) and Juniper Networks (NYSE:JNPR), Alcatel-Lucent's router business alone is very telling in how investors should view the stock.

A valuable segment
Alcatel-Lucent is an enormous telecom equipment company that reported more than $4 billion in first-quarter revenue. The company's revenue is created from a variety of industries and is separated into two segments. Its core networking segment includes routers, optical networking, and telecom software, while its access segment focuses on wireless networks like LTE, 2G, and 3G technologies, along with fixed line networks.

In this particular discussion, Alcatel-Lucent's core networking business is in focus. Analyst Sandeep Deshpande recently upgraded shares to Overweight, citing this particular segment of Alcatel's business as being more valuable than the entire company.

Alcatel's business of strength
Alcatel's total first-quarter revenue grew just 0.3% year over year, but its core networking segment saw growth of nearly 7% in the quarter and revenue of more than $1.8 billion. Deshpande notes that this segment has great upside potential, could reach revenue over $12 billion next year, and that operating margins of 7.1% will eventually rise north of 12.5%

According to Deshpande, Alcatel's impressive routing business is to blame for this bullish outlook; routers are used to deliver content and different types of services. During Alcatel's first quarter, routing created $750 million of the core networking's $1.8 billion in revenue and grew 16.4% year over year. Deshpande states that Alcatel's edge router business, which is typically smaller and faster with lower quantities of traffic to route, is No. 2 behind Cisco in the market.

However, Alcatel has also successfully entered the core router business, as its products are larger and more powerful for heavy traffic between networks, which has historically been dominated by Cisco and Juniper. Overall, Alcatel-Lucent has placed a lot of emphasis on its router business through its Shift program, an initiative to improve profitability and divest certain under-performing assets.

Meanwhile, industry leader Cisco has really struggled in this space, with sales falling a whopping 11% year over year during the first quarter. Importantly, routing makes up more than 20% of Cisco's $47 billion in annual revenue. Therefore, its decline has been a key reason that overall revenue has fallen for Cisco, which is quite odd, given this is a strength for Alcatel-Lucent.

How much is Alcatel's router business worth?
As for Juniper, it's a large player in the core router space, but with less than $5 billion in 12-month revenue, it's significantly smaller than both Alcatel-Lucent and Cisco. Nonetheless, Juniper's double-digit growth has pleased Wall Street, and as a result, it trades with a rich premium of 27 times earnings.

It's Juniper's valuation that could explain why Alcatel-Lucent's core networking, or routing business, alone is worth more than its entire company. For one, Alcatel-Lucent's routing business is smaller than Juniper's business, with $3 billion in revenue expected from the segment this year. However, Alcatel's routing business is growing faster and is equally as profitable. Therefore, if Alcatel earns $350 million in profit from its routing business this year, it would be worth $9.7 billion alone using the same earnings multiple as Juniper.

Foolish thoughts
The point is that, by looking solely at Alcatel-Lucent's fastest-growing and most profitable segment relative to its equivalent, Deshpande is likely correct in stating that core networking alone is worth more than Alcatel's entire company. Because, after all, routing is only 40% of the fast-growing core networking segment.

Albeit, Alcatel-Lucent is, in fact, undervalued and stealing market share from Cisco, and also now imposing on Juniper's turf. While the stock has been challenged so far this year, its valuation suggests that there is great upside in the company.


Brian Nichols owns shares of Alcatel-Lucent (ADR) and Apple. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple. 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.