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Why Alcatel-Lucent (ALU) is Plummeting

NEW YORK (TheStreet) -- Shares of French telecom Alcatel-Lucent (ALU) are plummeting in Thursday's trading session after receiving a downgrade from Deutsche Bank. By late morning, the stock had shed 4.7% to $4.39.

Deutsche Bank downgraded the company to "hold" from a previous "buy" rating with a price target of $3.30.

"While we remain positive on the company's SHIFT turnaround plan, we believe that deteriorating mix (China 4G builds, LTE overlay contracts) will put incremental pressure on gross margins in 2014," wrote analyst Kai Korschelt in a report.

Outlined in June last year, the company's SHIFT plan is a strategic push to strengthen its specialty in IP networking and ultra-broadband access, while reducing costs by Euro 1 billion by the end of 2015.

TheStreet Ratings team rates ALCATEL-LUCENT as a Sell with a ratings score of D. The 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 generally high debt management risk and disappointing return on equity."

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

  • The debt-to-equity ratio is very high at 3.98 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 0.92, 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 improved earnings per share by 31.6% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ALCATEL-LUCENT swung to a loss, reporting -$1.45 versus $0.37 in the prior year. This year, the market expects an improvement in earnings (-$0.72 versus -$1.45).
  • The net income growth from the same quarter one year ago has exceeded that of the Communications Equipment industry average, but is less than that of the S&P 500. The net income increased by 17.9% when compared to the same quarter one year prior, going from -$408.82 million to -$335.70 million.
  • Net operating cash flow has increased to -$150.95 million or 48.56% when compared to the same quarter last year. Despite an increase in cash flow, ALCATEL-LUCENT's average is still marginally south of the industry average growth rate of 49.73%.

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