Alcatel-Lucent (Paris: ALU), rated OVERWEIGHT by Evercore Partners
The eurozone crisis has seen European shares take a pounding. The German DAX and French CAC stockmarket indices have dropped 20% over the past three months, against a mere 5% loss for the FTSE 100. That’s left some attractive companies trading at bargain prices.
Take telecoms equipment giant Alcatel-Lucent. Its shares have almost halved since May, yet it operates in what is currently one of the world’s few genuine growth hotspots: wireless broadband and data traffic. Video-on-demand services (such as the BBC iPlayer) and the surging popularity of smartphones and tablets are putting increasing strain on existing internet infrastructure. In many cases, there is now no option but for the owners of the optical pipes that carry all this data (such as France Telecom and China Unicom) to shell out on upgrading to the next generation of equipment, regardless of the threat of a second recession. That’s good news for Alcatel.
Investors are also fretting too much about the company’s ongoing turnaround plan. In late July the company missed expectations for adjusted second-quarter earnings. But this needs to be viewed in the context of the widespread disruption caused by the Japanese earthquake. Chief executive and industry veteran Ben Verwaayen says they aim to post a 2011 operating profit margin of 5% (compared to 2.8% in the second quarter) and to outperform the sector, which Verwaayen has previously said he expects to expand by about 5%.
Verwaayen has also allayed fears that big clients, such as Verizon Communications, are tightening their belts. He still expects a strong second half in America (40% of revenues) and the order book is “very robust”, as shown by good prospects for big contract wins with the likes of Sprint and AT&T. Moreover, in September Alcatel won a prestigious €350m deal with the French Ministry of Defence.
Analysts expect turnover and underlying earnings per share (EPS) of €16.4bn and 22.0 cents respectively this year, rising to €17.1bn and 29.2 cents for 2012. I rate the stock on an earnings before interest, tax and amortisation (EBITA) multiple of ten, assuming sustainable margins of 6%. After adjusting for the €0.4bn of net debt and a €1.9bn pension deficit, that gives an intrinsic worth of around €3.25 a share.
The risks include cut-throat competition from the likes of China’s Huawei Communications and Sweden’s Ericsson, and Alcatel is exposed to price deflation, foreign-currency shifts and component shortages. But with the euro likely to head south due to continued fears over Greece, the firm’s products could soon get a lot cheaper on the worldwide stage. With internet usage soaring and 4G wireless technologies being introduced, Alcatel should do well whatever the weather.
Third-quarter results are due out on 4 November. Evercore Partners has a share-price target of $10 (about €7).
Rating: BUY at €2.40