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Alcatel Lucent SA (ADR) (ALU): Cutting Costs Should Not Be Part of This Company’s Plan!

Telecom equipment company Alcatel Lucent SA (ADR) (NYSE:ALU) is on pace to post its first year of gains since 2009. In 2013, the stock has rallied 35% — but during the last seven months the stock is higher by 87%.

Alcatel Lucent SA (ADR) (NYSE:ALU)

These large gains are not due to any fundamental improvements – rather a plan on behalf of the company to monetize its industry-leading IP portfolio and divest the problem areas of its business.

Back in December, Alcatel Lucent SA (ADR) (NYSE:ALU) secured $2.1 billion to undergo this process, thus leaving many bullish of its future. However, a bearish article in the Wall Street Journal by Renee Schultes pushed shares lower by 1.5% on Tuesday, as she has serious doubts of the company’s direction.

Could put off drastic surgery?

In the article “Alcatel-Lucent Could Put Off Drastic Surgery,” Schultes writes that the new CEO, Michael Combs, might very well place a greater emphasis on cost-cutting versus asset sales.

Schultes does not source any reports in her piece, but rather presents it as a “hunch.” If correct, this would contradict the company’s public plan and would be bad news for the stock – due to the $2.1 billion in debt financing being raised to unload assets.

Schultes might be right

As an Alcatel Lucent SA (ADR) (NYSE:ALU) long, I hate to admit it, but Schultes may be right. Schultes is simply stating what most investors have thought during the last few months.

Michael Combs has been the CEO at Alcatel for approximately four months. Therefore, the debt financing and “plan” to divest was announced by the prior CEO. At the time, there were a lot of reports that Alcatel Lucent SA (ADR) (NYSE:ALU)’s old-school board was not thrilled about a leaner and meaner Alcatel. Therefore, it is possible that Combs will have a different vision, and it could be cost-cutting.

Combs will outline a business strategy on Wednesday, and I must say, I am nervous about what we might learn. Alcatel-Lucent has a long and storied history of cutting costs. The company currently employees more than 70,000 people, which is about half of its employment compared to 2008.

While laying off employees has “cut costs,” the stock is lower by 71% during this period, showing that “cutting costs” is no longer effective. Alcatel-Lucent needs to take drastic measures to create shareholder value.

It’s time to quit playing around

With a market cap of just $4.25 billion, not many people realize the size of Alcatel Lucent SA (ADR) (NYSE:ALU). This is a company with sales of $18.73 billion over the last 12 months; meaning it trades with a price/sales of just 0.23.

Alcatel’s most significant competition includes Cisco Systems, Inc. (NASDAQ:CSCO) and Ericsson (ADR) (NASDAQ:ERIC). Cisco has revenue of $47.88 billion and Ericsson has $34.35 billion over the last 12 month. Hence, Cisco Systems, Inc. (NASDAQ:CSCO) and Ericsson are 2.55 and 1.83 times larger than Alcatel in terms of business size. Yet, Cisco has a market cap of $132 billion and Ericsson is worth almost $40 billion.

The market is deeply discounting the size of Alcatel Lucent SA (ADR) (NYSE:ALU). Cisco Systems, Inc. (NASDAQ:CSCO), a company that is just 2.55 times larger, is worth 31 times more than Alcatel; and Ericsson (ADR) (NASDAQ:ERIC) is worth nearly 10 times more than Alcatel. These companies operate in the same industries, yet are different in operating efficiency.

Company Operating Margin Price/Sales Ratio
Alcatel-Lucent 0.37% 0.23
Cisco 17.80% 2.76
Ericsson 7.98% 1.12