Why Alcatel-Lucent is a HOLD and a Potential STRONG SELL on Any Weakness
This article is a continuation of the previous ALU article “Given the Competitive Landscape, is Alcatel-Lucent Stock a HOLD or SELL?”, which presented an overview of ALU’s stock potential from a fundamental analysis and stock valuation perspective (make sure to check it out first). This Part II article presents an overview of Alcatel-Lucent’s stock potential from a technical, favorable/negative catalysts and overall bottom line perspective.
- Technical Perspective
At the time of this analysis, ALU is trading around $1.34. This is around the mid-point of its 52-week trading range of between $0.91 and $2.39. The stock was trading at $2.32 at close of business on April 4 2012, which means it has declined by over 42% over the course of the year.
From late July 2012 through mid Nov 2012 the stock was range-bound between $1 and $1.27, building a classical technical base for an eventual upward move. In mid Dec 2012 it rebounded and started an upward move, reaching a high of $1.73 in early Jan 2013, during which time it exhibited a classic Golden Cross manuver, where the 50-day Simple Moving Average (SMA) moved above its 100-day and 200-day SMA's.
However, the upswing was shortlived and by late Feb 2013 the stock had given up most of its gain and was trading at $1.36. The firm's dismal 2012 financial results were a major contributor to this slide. By late March 2013, the stock had fallen below its 100-day SMA support, and also tested support at its 200-day SMA of $1.31, falling below that support level briefly.
The stock saw a brief surge in late March 2013, however, barring a major catalyst, it would seem that the stock will likely trade in the $1.30 range for sometime.
- Favorable Catalysts
One of the most positive catalysts for the company is its huge and continued investment in R&D spending. Another advantage that ALU enjoys, although it is slim and waning, is its loyal customer base. That, and the tremendous depth of human and intellectual capital from Bell Labs, places the company in a unique position to be able to turn around its declining fortunes in the coming years.
While ALU does enjoy the advantage of being a broad and well-respected global player in the Telecommunications Equipment industry, the company carries a significant debt load which makes its balance sheet look extremely vulnerable. With a Debt/Equity Ratio of 178.78x, the company carries a significantly high debt burden than its industry peers, including CSCO (29.34x) and ERIC (21.93x).
The significant debt burden that the company carries makes it extremely vulnerable to even a slight increase in interest rates. Furthermore, even a slight downturn in the economies of its major market segments will mean the company could face a tough time servicing its debt obligations because of declining revenue. With a debt burden as significant as ALU carries, the company could also face huge challenges obtaining additional capital at reasonable rates, should that ever be a requirement.
While the company is in the midst of a gradual restructuring process, it is also losing out on sales to its major competitors. The company's dismal Profit Margins (-9.51%) are an indication that competitors like CSCO (with a profit margin of 19.72%) and ERIC (with a profit margin of 2.54%) are gradually edging ALU out of a market where price plays an important factor in gaining sales.
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The global financial crises, especially the European challenges, could also take its toll on the company. Slowing investment in new IT and Telecom spending might mean that the company's ambitious cost-cutting and restructuring plans might not be sufficient to bail them out of the current dire financial situation quickly.
- Bottom Line Conclusion
Based on our fundamental, valuation and technical analysis, Alcatel-Lucent (ALU) would rate as a HOLD for now. It, however, should be considered a STRONG SELL on any further signs of weakness. Our bottom line conclusion is reinforced by the strong downside earnings surprises (of -500% and -3,600%) that analysts have seen over the past 2 quarters.
Good luck in your investing. Let us know if you have any questions, comments or feedback,
MarketConsensus Stock Analysis Team