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TheStreet Open House

Alcatel-Lucent (ALU) Struggles, Sprint (S) Sees Gains

Stocks in this article: ALUS

NEW YORK (TheStreet) -- Alcatel-Lucent's (ALU) uncertain future was put in the spotlight as CEO Michel Combes defended his plans to turn the company around.

"This company could disappear," CEO Michel Combes told radio station Europe 1 on Tuesday. "This company hasn't made money since 2006."

The French telecommunications manufacturer plans to cut 10,000 jobs by 2015, saving 1 billion euros ($1.4 billion) and reducing fixed costs by more than 15%. In Paris on Tuesday, 1,500 Alcatel-Lucent employees marched to the Eiffel Tower in protest of the cuts.

"We must make difficult decisions and we will make them with open and transparent dialogue with our employees and their representatives," Combes said in a statement last week.

U.S. telecommunications company Sprint Corporation  (S) shares have gained after a Macquarie upgrade to "outperform" from "neutral." Macquarie raised its price target to $7.50 from $7. Analyst Kevin Smithen said recent weakness has created an entry point to take advantage of potential 20% to 30% gains in 2014.

Alcatel-Lucent dropped 1.32% to $3.60 as of 11:30 a.m. New York time, while Sprint shares were 3.81% higher to $6.26.

TheStreet Ratings team rates Alcatel-Lucent as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate Alcatel-Lucent (ALU) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, generally high debt management risk, disappointing return on equity and feeble growth in its earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Communications Equipment industry. The net income has significantly decreased by 123.2% when compared to the same quarter one year ago, falling from -$518.9 million to -$1,158.23 million.
  • The debt-to-equity ratio is very high at 3.91 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Along with the unfavorable debt-to-equity ratio, ALU maintains a poor quick ratio of 0.99, which illustrates the inability to avoid short-term cash problems.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Communications Equipment industry and the overall market, Alcatel-Lucent's return on equity significantly trails that of both the industry average and the S&P 500.
  • Alcatel-Lucent has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, Alcatel-Lucent swung to a loss, reporting -$1.35 a share vs. 37 cents a share in the prior year. This year, the market expects an improvement in earnings (-42 cents vs. -$1.35).
  • 36.57% is the gross profit margin for Alcatel-Lucent which we consider to be strong. Regardless of ALU's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, ALU's net profit margin of -24.32% significantly underperformed when compared to the industry average.

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