During the 1990s, telecom equipment provider Alcatel-Lucent (NYSE:ALU), was a red-hot company, with its stock reaching nose-bleed levels. It benefited from the huge buildout of new telecom and Internet technologies.
But with the dot-com bust, the impact was a long-term deterioration of Alcatel-Lucent. In fact, there were concerns that the company would eventually go bust. After all, this did happen to rival Nortel.
Yet Alcatel-Lucent has been able to stage a turnaround. If anything, the company looks like a growth play again. Just in the past year, the shares have gone from $2.25 to $6.30.
No doubt, it has been a nice run. But is there more room on the upside? Here’s a look at the pros and cons:
Pros
Global platform. Alcatel-Lucent has telecom equipment solutions and software applications for areas like networking, wireless systems, optics and so on. More importantly, the company is one of the few that has the scale to take on global projects, which can result in billions in revenue. It also helps that the company has continued to maintain its competitive advantages with large investments in research and development.
Restructuring. Over the years, Alcatel-Lucent has taken tough measures to pare down costs. There have also been moves to dispose noncore businesses. As a result, the company has been able to improve its margins and free cash flows.
Secular trends. With the growth of smartphones and Internet applications like YouTube and Facebook, there has been an explosion of data. To deal with this, there has been a nice uptick in spending for Alcatel-Lucent’s equipment. In the latest quarter, the company’s revenue increased 15.2%.
Keep in mind that technology infrastructure is a key element of China’s current Five-Year Plan. To this end, the country is aggressively investing in telecom and Internet equipment.
Cons
Competition. There are only a handful of direct competitors, like Ericsson (Nasdaq:
ERIC), Nokia-Siemens and Huawei. Yet there are generally a small number of contracts in play. Thus, this can put pressure on pricing.
Debt. With its acquisitions, Alcatel-Lucent has accumulated a large amount of debt. The long-term portion is about $9.7 billion. Of this, about $4.5 billion is for pension obligations.
Economy. Even a mild recession can have a big impact on Alcatel-Lucent — customers may delay contracts or even cancel them.
While the global economy looks stable, there are some risk factors. For example, inflation is becoming a big problem in the emerging markets.
Verdict
Alcatel-Lucent’s CEO, Ben Verwaayen, understands how to solve problems with large organizations. He was formerly the CEO of BT (NYSE:BT), where he structured a turnaround.
As for Alcatel-Lucent, the story is now more than just about cutting costs and getting things back on track. Rather, it is a company that is nicely positioned to benefit from some mega-trends in technology. In other words, there is likely to be strong top-line performance for the next few years. Of course, this will also mean an uptick in cash flows.
True, Alcatel’s stock price has already spiked. But in light of the long-term growth potential, the pros still outweigh the cons on the shares.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
