Remember those wonderful days when telecom stocks like Alcatel (NYSE:ALA), Lucent (NYSE:LU), and Juniper (NASDAQ:JNPR) were all the rage and investors mocked people who mentioned words like "oil" or "copper"?
I sure do. So with Alcatel pre-announcing better-than-expected earnings for the second quarter and the stock up almost 10%, is this déjà vu?
Alcatel management announced that earnings for the quarter were going to come in at $0.16 per share, two cents better than expectations. On the top line, revenue came in at about $3.8 billion -- also above expectations -- and grew 8% from the prior year.
Management didn't go into a lengthy discussion of the reasons for the company's outperformance; presumably, that will come at the end of the month when it makes its full earnings presentation. That said, management said it saw strength in IP routing and optical transmission, mobile communications, and enterprise solutions.
The company also indicated that operating margins had come in slightly better than 8% of revenue. Given that poor first-quarter margins (in part, because of emerging market business) hurt results, this is a solid improvement, and it certainly lends credibility to management's previously stated goal of 10% operating margins for 2005. It's been quite a while since Alcatel was able to achieve that sort of profitability.
This is certainly good news, but let's not get ahead of ourselves. Alcatel still has more than a few challenges. Remember companies like Lucent, Siemens (NYSE:SI), Nokia (NYSE:NOK), and Ericsson (NASDAQ:ERICY)? Well, they're still around and trying hard to knock each other out of the market.
What's more, for all of the talk of new technologies like WiMax, the realities have often proven to be a little less rosy. Take the case of FTTP (fiber to the premises) -- Verizon (NYSE:VZ) has supposedly slowed down its rollout plans, which isn't great news for Alcatel. I'm sure that most of these next-generation systems will be deployed eventually, but investors sometimes seem overly optimistic about the timelines involved.
Looking at Alcatel's stock, it seems that a lot of recovery has already been factored into the valuation. Sure, the stock isn't all that expensive on a P/E basis (especially relative to historical levels), but then nobody is expecting all that much growth, either. Unless you think that Alcatel can deliver sustainable earnings growth in the mid-teens or higher, I'd say the shares are pretty much fully priced today.
For more on the companies behind the phones:
- SupportSoft's Silver Lining
- Avanex: Fear Factor Stock?
- Translated From the Canadian
- Juniper Sprouts Again
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
