What I find interesting about Alcatel Lucent SA (ADR) (NYSE:ALU) is that it appears to be following the same pattern as Sprint. In 2012, Sprint was dead money for the first four months, much like Alcatel this year. Then, afterwards gains were continuous, much like Alcatel’s 22% gain in the month of May.
Will the large gains continue?
Back when I chose Alcatel Lucent SA (ADR) (NYSE:ALU), it had seen a great deal of upside to end 2012 due to its plan to become a smaller but more efficient company. Alcatel secured financing from Goldman Sachs and then began the process of evaluating its assets and intellectual property in an attempt to sell its unprofitable segments and increase margins.
My thought process behind the choice was very similar to that of Sprint: common sense! Alcatel Lucent SA (ADR) (NYSE:ALU) is a massive company with a small cap valuation, thus its sum-of-parts equate to great upside for the stock.
Alcatel has a market cap of $3.8 billion and revenue of $18.7 billion. It operates in an industry that trades at 1.2 times sales. Thus, in a perfect world, its market cap would be near $22 billion, or its stock price near $10.
Unfortunately, price/sales is not universal, and companies have different multiples depending on various factors such as growth and efficiency. In the telecom equipment industry, higher multiples are awarded to those that are more efficient – stocks in the industry typically trade with operating margins between 10% and 17%.
However, If Alcatel Lucent SA (ADR) (NYSE:ALU) can sell 30%-50% of its business and focus on the segments with operating margins between 10% and 17% then it will likely trade with the same multiples as other companies in its space. Furthermore, investors will be even more optimistic as Alcatel has high-growth segments and will use cash from divestments to pay off debt. Combined, this will create great upside throughout 2013.
Final thoughts
Late last year, the idea of Alcatel’s restructuring plan created significant upside – and now after four months it looks as though investors are buying once more. Strangely enough, it does follow the same pattern as with Sprint – but in order for it to continue – the company must execute on its restructuring plan.
With Sprint, I never feared whether gains would or would not be created. I made it my second largest holding at $2.35 and then sold around $6.50. With Alcatel, I don’t have the same level of confidence.
Back in January I was very confident – but with the hire of a new CEO it is imperative that all executives and board members are on the same page. The company has a massive IP portfolio to monetize and if the company can cut its operations by 30% and achieve margins on the low end of the industry average then it should warrant the same multiples as other telecom equipment stocks; which would represent a valuation that is two-four times greater than its current market cap.
In my opinion, this is easily attainable – but the company has to execute its original plan – and that is yet to be seen.
Brian Nichols is long ALU. The Motley Fool has no position in any of the stocks mentioned. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Could This Telecom Equipment Stock be a Late Bloomer? originally appeared on Fool.com is written by Brian Nichols.
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