Alcatel-Lucent’s Runup Looks Real

Abandoned for years by most nondaytrading investors, Alcatel-Lucent (NYSE:ALU) has seen some good times recently. On the back of strong revenue growth across all regions, the company recently reported that fourth-quarter profit rose more than 7 times to $450 million.. Several investment firms have slapped buy ratings on the stock, which has more than doubled in the last three months,  reaching toward $6 for the first time in nearly three years.

The bull run has led many to wonder if the surge is a temporary blip or a sign of sustained growth. Given developments in the broader tech industry, the latter seems more likely.  

Smartphone sales will surge by more than 49% this year. Similarly, the market for tablets is expected to increase by nearly 10 times by 2014. Finally, China Mobile, the world’s largest mobile carrier, will boost capital spending by 6.5% this year.

Those data points may seem unrelated, but they are intimately connected to Alcatel-Lucent’s business of making networking equipment and carrier switches. For example, smartphones and tablets require carrier-switching networks for operations. Similarly, Internet connections for tablets require wireless networks. Thus, telecom companies, such as AT&T (NYSE:T) and Verizon (NYSE:VZ), will have to invest significantly in networking infrastructure (read: buy more routers and networking gear from vendors) to provide such services.

In response to the demand, Alcatel-Lucent has increased investments and cut prices to challenge market leader Cisco (NASDAQ:CSCO) in the ethernet switches and IP routers category. Last year saw the company increase revenue by more than 56%  in this category. In the process, Alcatel-Lucent also displaced Juniper Networks (NASDAQ:JNPR) to become the second-largest vendor in the space. Along with an aggressive sales strategy in the fixed broadband (where it is already a leader) and mobile markets, the company is also ramping up innovations on 4G technology. The last-mentioned category has already translated into major sales.   

A combination of recession and merger costs took its toll on the company’s finances. While the former decreased corporate spending and increased component shortages, the latter increased company operating costs and debt. The result has been a negative cash flow. However, according to the CEO, Ben Verwaayen, the company should be cash flow positive this year. Given his track record in executing a rapid turnaround for the company, there is no reason to doubt him.  

Cash flow problems aside, Alcatel-Lucent’s recent string of successes has been tempered with good luck. Mergers are generally bad news for vendors of individual companies. Considering the relatively few players in the telecom space, the proposed merger between AT&T and T-mobile should have spelled disaster for Alcatel-Lucent. However, it may not turn to be such a bad deal for the company as it is a major infrastructure supplier to both companies.

This, combined with the impending telecom revolution, should let the good times roll at Alcatel-Lucent.


Article printed from InvestorPlace Media, https://investorplace.com/2011/03/alcatel-lucents-runup-looks-real/.

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