As you can see, the higher market capitalization relative to sales is awarded to the company with the higher margins. Therefore, sales are really meaningless in this industry. For further proof, Juniper Networks, Inc. (NYSE:JNPR) (another competitor) has a market cap that is more than double of Alcatel, yet has just 25% as much revenue. The moral to this story: Alcatel needs to quit fooling itself, and quit trying to maintain its size, because margins are what investors want to see.
If you look at the chart above, you might see weakness for Alcatel, but I see room for improvements. Alcatel operates in numerous industries, across dozens of countries, and some of these operations create very nice margins.
The company has a very good presence in North America, recently won a contract in China, and is even expanding networks in Europe. However, there is no reason for the company to keep segments such as its submarine optical cable unit. This one unit in particular has an estimated worth of $1.1 billion, and does nothing but drag Alcatel’s margins lower. A sale of this level could drastically change the landscape for this company.
On Wednesday, investors need to hear that Alcatel Lucent SA (ADR) (NYSE:ALU) is serious about its divesting program, and that it is ready to sell assets. This is a company whose sum of parts are worth about 5.5 times its market capitalization ($18.73 billion revenue times the telecom industry price/sales ratio 1.25).
The company needs to unload these assets and focus on the assets that return high margins. Then, with money raised from selling assets, it can pay off debt and become more efficient. If the company maintains this course, the upside for the stock could be unprecedented, definitely the greatest in the telecom equipment industry due to its valuation. But if not, then expect most of Alcatel’s seven month gains to be returned to the market, as these gains were in response to the possibility of “change.”
The article Cutting Costs Should Not Be Part of This Company’s Plan! originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols owns shares of ALU. The Motley Fool recommends Cisco Systems (NASDAQ:CSCO). Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.