Betting on a turnaround can prove to be a very lucrative investment if you pick the right company. It isn't as easy as it sounds, as comebacks can often end in disasters, thus it's important for investors to pick the right company. One company on a turnaround trail that's worth considering is Alcatel-Lucent (ALU) . In short, partnerships with Qualcomm (QCOM) and Intel (INTC) are why Alcatel's turnaround will be successful and why investors should consider this company for their portfolios.
A brilliant CEO
Although Alcatel-Lucent is down over 12% in 2014, the company is in the right hands and has strong upside potential. Michel Combes, Alcatel's CEO, seems to be a smart leader; he has taken the right steps to transform the equipment maker into a company that can remain profitable over the long term. In February, Alcatel delivered its first quarterly profit in two years, indicating that Combes' bold Shift Plan is starting to take effect.
As part of his Shift Plan, Combes promised sales of non-profitable assets worth €1 billion, and a €1 billion reduction in overhead by 2015. He is sticking to his words and will oversee his second disposal by selling Alcatel's 85% stake of its enterprise unit to China Huaxin.
Getting rid of non-profitable assets is a must for any company, but it is even more important for Alcatel-Lucent. With a debt/equity ratio of 168, it is evident that Alcatel is highly leveraged. As a result, the company often fails to generate enough cash to keep up with interest expenses. Thus, Combes' Shift Plan is a masterstroke, as it will not only help the company enhance its margin, but also improve its overall financial outlook. The company can use the cash to pay off debts and sustain long-term profitability.
Combes knows that cost-cutting and divestments are not enough to reverse Alcatel's fortunes. The company has taken multiple steps in the correct direction and may complete its fairy tale turnaround sooner than many expect.
The company recently said that it would stay clear of a potential price war in the telecom equipment market and will set itself apart by providing better service and fresh products. The company announced a partnership with Intel to conduct research in cloud and security technologies. The two will also focus on Virtualized Radio Access Networks, developing and optimizing Alcatel-Lucent's CloudBand Network Function Virtualization platform, and high-performance packet processing for advanced IP/MPLS platforms and cabinets.
In addition, Alcatel has also extended its software-defined networking, or SDN, capabilities, which will benefit the company in coming years. Per AGC Research, service providers spending on SDN systems will reach $15.6 billion in 2018, up from $626 million in 2013.
Tie-up with Qualcomm
Alcatel's partnership with Qualcomm to develop multi-mode cells is set to bear fruit in coming years. The multi-mode cells that combine Alcatel's lightRadio radio access network with Qualcomm's small cell chips are expected to hit the market by mid-2014.
The two companies expect to launch small cells with improved wireless network reception in environments such as urban areas, shopping malls, and other enterprise venues. Mike Schabel, VP of Alcatel-Lucent's small cell department, declared that all of Alcatel's small cells will have integrated Wi-Fi going forward.
As of January 2014, Alcatel had 65 contracted, revenue-generating clients in 42 countries. Increasing sales of smartphones and tablets have resulted in increased demand for data usage, and the deployment of small cell base stations will not only shrink overheads for Alcatel, but also improve the network speed.
Alcatel-Lucent has a database of over 600,000 qualified sites available for small cell rollout across the U.S. and western Europe, and according to the Small Cell Forum, this figure can easily go up to 11.5 million by 2018.
Alcatel is moving in the right direction under a strong management team. The company is doing the right things by selling off non-core assets and inking key partnerships with leading players to grow sales. So, Alcatel looks like a turnaround play that shouldn't be missed.