It was a good year for the telecommunications equipment industry in 2013, especially Alcatel-Lucent (ALU, Financial), which almost tripled last year. Another closely watched company was Cisco (CSCO, Financial), a bellwether in telecommunication equipment. Both of these companies performed decently in 2013, but Cisco saw some weakness toward the end of the year. The question is whether they will remain good investments in 2014. The answer appears to be yes.
Alcatel’s Moves
Alcatel is focusing on the mobile network market and is selling off non-core assets. In 2013, Alcatel took various measures to re-build its business on the new path. The company now plans to be much more focused in mobile networks for ultra-broadband access and Internet-protocol networking.
Alcatel’s focus on this market is not surprising as the mobile network market is growing quite fast due to an increase in mobile subscriptions globally. It is predicted that by the end of 2014, the number of mobile subscribers worldwide will reach 7.5 billion. By 2016, this number is expected to hit 8.5 billion. Alcatel plans to focus on such high-growth areas as LTE and high-speed broadband for revenue growth. At the same time, it is looking to lower fixed costs by more than 15%, saving a total of $1.37 billion. This looks like a good strategy as the company will be able to grow its business in fast-growing areas and also control costs.
Alcatel is shedding non-core assets and recently sold off its U.S. subsidiary LGS Innovations for $200 million. Now, Alcatel has further plans to sell off its enterprise business. The potential buyers are Unify GmbH & Co. KG, a Gores Group LLC and Siemens AG venture. The enterprise business was mainly involved in selling telecommunication equipment and services and was incurring a loss. By selling this business, Alcatel enjoys a dual benefit by generating extra cash to strengthen its balance sheet and disposing of an under-performing asset.
A Big Win
Given these gradual and on-going improvements, Alcatel-Lucent is all set to witness its first year of overall profitability since 2011. Therefore, it looks like the company is all set to enjoy better times in 2014 as well.
Alcatel-Lucent has also established a stronger footprint in the Chinese mobile market where it has won tenders for selling LTE equipment to China Mobile. In December 2013, Alcatel-Lucent was granted the tender for rolling out TD-LTE in China. China Mobile will be installing Alcatel-Lucent’s metro cells in public areas for its TD-LTE network. Alcatel-Lucent is now one of the three companies picked by the Chinese telco to supply equipment for the FDD-LTE and TD-LTE networks.
Cisco and Juniper
One of Alcatel-Lucent’s biggest rivals is Cisco. The two compete mainly in the router business. The router market has been dominated by companies such as Cisco and Juniper (JNPR), but Cisco is facing strong challenges from software defined networking (SDN) solutions. Also, Juniper is posing a major threat to Cisco with its software-defined network solutions.
Network up-time in the era of cloud computing is an important factor to provide quality and zero downtime. Juniper’s development of “High IQ” networks claims to provide 100% up-time and it also claims that it can never go down.
With this technology, Juniper is looking to increase its customer base and bag new clients in various cloud-centric data centers. Network security is also an important factor and the “High IQ” based networks are hack proof, enhancing Juniper’s credibility. But, Cisco’s diversification is what sets it apart from Juniper.
Cisco’s Move Into the Internet of Everything
Cisco is also eyeing the Internet of Everything (IOE). IOE has been revolutionizing our lives with smart homes, cars, drones and various entertainment devices. According to Cisco’s research team, 37 billion new things will be hooked on to the Internet in the next eight years. It is also projected that 2.5 billion people will be new users of the Internet by that time and Cisco is looking to tap this market.
For example, Cisco collaborated with New York City to launch an interactive platform to provide valuable information to the public. This information can be accessed from any device connected to the Internet. This is just the beginning of a new era where IOE will be transforming the lives of city dwellers.
IOE, as defined by Cisco, will integrate process, data and things with networked connections, bringing a richer experience and relevancy. This will further create a better economic opportunity for individuals, corporations and even countries.
Thus, Cisco’s focus on IOE should help it reap the benefits in the future due to its wide application.
Fundamentals and Conclusion
Both Alcatel-Lucent and Cisco are looking to maintain their momentum in 2014 while employing different strategies to do so. As far as an investment in either is concerned, both companies could prove to be good picks. Alcatel is currently generating a net loss, so there is no P/E metric available for valuation. However, the company’s cheap PEG ratio of 0.27 indicates that analysts expect the company to grow at a fast pace in the future. Analysts expect Alcatel’s earnings to grow 97% next year, which means that another good year lies ahead.
Cisco, on the other hand, is a more conservative pick with a P/E ratio of just 12.45. Its PEG ratio is higher at 1.37, but it also has a juicy dividend yield of 3%, making it a solid investment. Also, its five-year earnings growth forecast is pegged at 8.4% annually, but given Cisco’s solid dividend and cheap valuation, it could be a decent investment. All in all, both Alcatel and Cisco look like good picks depending on investors’ taste and both could outperform the broad market in 2014.
