Is Alcatel-Lucent, the world’s biggest telecoms equipment maker, on the road to recovery? This might seem a daft question given last week’s huge €5.2bn loss for 2008 on revenues of €17bn. But while it’s a shocking headline result, there was at least some light at the end of the tunnel after two years of unrelenting bad news. Firstly, the numbers looked ‘kitchen sinked’ in that they included €4.7bn of asset write-downs that should put the balance sheet on much firmer ground. Also, although earnings dropped, the group still generated €658m in cash flow in the fourth quarter of last year, trimming net debt to a comfortable €389m. This deficit should be wiped out in late spring, when the firm completes the €1.6bn disposal of its 20.8% stake in Thales to Dassault Systems.
Alcatel-Lucent (Euronext:ALU)
The new chief executive, Ben Verwaayen, is not wasting any time implementing his tough-nosed turnaround plan. Cost savings of €750m involving 6,000 fewer heads have been announced with the target of breaking-even this year and gradually delivering profit margins of 5%-9% by 2011. Verwaayen is basing his assumptions on a frugal 12 months ahead, during which he believes the market will shrink by 8%-12%. But Alcatel may be able to outperform; one of its fiercest rivals, Nortel Networks, recently filed for bankruptcy, offering opportunities to mop up new customers.
Another major hope is China, where 3G mobile licences have just been awarded to the local wireless carriers. This should spur a huge surge in spending on equipment, estimated by the Chinese government to be around $40bn. Although Alcatel is not the leader in mobile, it is one of the top three players in the country, so should be well placed to benefit. Lastly, the shares look cheap for a technology heavyweight. Assuming Verwaayen can deliver, I would put the stock’s fair value at around €2.70 per share.
So what are the catches? Well, on top of the tough climate, Alcatel is also exposed to price deflation, intense competition, foreign currency shifts and ongoing restructuring issues. There is also a €2.5bn pension deficit that spiked by €1.6bn in the last three months due to a sharp decline in the AA-corporate bond yields that are used to value retirement benefits. But with the internet still expanding rapidly, Alcatel looks a good play on the future growth in optical communications.
Recommendation: speculative BUY at €1.39
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.