The restructuring plans for the telecom equipment maker, Alcatel-Lucent (ALU, Financial), initiated in June of last year, has enabled the company to earn rich dividends. The stock increased more than 125% since the plan was announced last year and the shine for the stock is not yet over. The LTE roll out in China and woes of rival Cisco Systems (CSCO, Financial) are some of the numerous catalysts that could power Alcatel to new highs.
Smart Strategies
Alcatel was able to overcome and cut down its net loss almost in half in 2013 and posted its first quarterly profit since March 2012. CEO Michel Combes targets on making Alcatel cash flow positive and profitable on a sustainable basis by 2015, and the company can most probably achieve this on account of experiencing some good adoption of its products in the market.
There are several catalysts that power Alcatel: first, the company’s leading position in the U.S. market; second, the absence of Chinese equipment providers from the Chinese market due to security reasons has helped Alcatel’s turnaround; third, the company enjoys healthy margins in the U.S. and is the leading player in the internet protocol and broadband segments.
Alcatel’s decision to center on LTE and small cells is a very good decision as these are growing segments around the world. The telecom vendors in the U.S. are deploying LTE coupled with adding small cells to help improve network capacity so that they can serve a larger number of users. This strategy helped Alcatel to increase its revenue 14% in the U.S. in the previous fiscal year.
Cisco's Troubles Are Advantageous
Cisco’s woes are further helping Alcatel, as Cisco is struggling to sell its equipment in the emerging markets and is also being brought down by product transitions. Cisco now plans to transform itself into a software and services provider, while on the hardware side, it aims to focus on data center equipment and security solutions. This has given a massive opportunity for Alcatel to tap into Cisco’s market share in the U.S.
Cisco has cut down its growth forecast for the next three to five years. The sales are expected to grow 3% to 6% over the coming three-to-five years as against the earlier expectation of 5% to 7%. This clearly points out the weaknesses of Cisco and its struggle towards becoming a service provider from hardware. An increasingly tough competition from Alcatel has hurt the sales of Cisco’s latest routers. Cisco’s management accepts its late entry into the market with their latest routers, leading to loss of market share.
However, Cisco is still performing decently in data center hardware and it is vital for the company to focus on areas where it is seeing strength. Alcatel can capitalize upon this opportunity and has already made some progress in this area. The Shift Plan of Alcatel has helped it increase sales of its LTE products.
Focus on Efficiency
Globally, Alcatel has shipped more than 125 million Voice over IP subscriber licenses with most of it being accounted for by Voice over LTE (VoLTE). Through VolTE operators can reduce operational costs as it operates on an IP network and reduces spectrum needs, thereby freeing up space for other services such as video conferencing and data, increasing the efficiency of 4G networks. Alcatel is able to gain more customers on account of providing end to end solutions to customers. The company already has more than 100 service providers across the globe for its 4G solutions giving it an added advantage.
However, Alcatel is experiencing weak sales in Europe with sales reducing 3% in 2013. But Alcatel could execute a turnaround in this market also. Swisscom has adopted the company’s fiber-to-the-home technology in Switzerland. Swisscom is the fastest residential broadband service in Switzerland by delivering 1 GB per second access to around one-third of households in Switzerland through Alcatel’s Intelligent Services Access Manager.
Opportunity
Alcatel can gain its footing back in the European market with the help of such product development moves. But, China is one of the most lucrative markets for Alcatel nowadays, where China Mobile is bullish on rolling out the world’s largest LTE network. China Mobile plans to build 500,000 TD-LTE base stations in 340 major cities in 2014. The total number of base stations in China for TD-LTE is estimated to exceed 700,000 this year, covering 3 billion people in the country.
Alcatel has signed a deal for supplying small cells to the telecom giant. The Metro Cell solution of Alcatel is expected to power China Mobile to fulfill the increasing demand for data across urban areas in China in an effective and economical manner. China Mobile as expected of incurring record capital expenditure this year on LTE deployment is bound to benefit Alcatel.
Conclusion
Going forward, it is quite natural for investors to expect big things from Alcatel with such solid tailwinds. Yet analysts are quite bullish about Alcatel’s prospects since its earnings grow rate is at a CAGR of a whopping 83% over the next five years. The company is quite confident of becoming sustainably profitable by 2015, and at a forward P/E of just 20, Alcatel is quite cheap for investors to invest in this growth story even after appreciating tremendously over the past few months, making it a good buy even now.
