ALU's Cuts Don't Address Long-Term Growth

NEW YORK ( TheStreet) -- Given what many readers have described as "my endless bashing" of Alcatel-Lucent's ( ALU) recent cost-cutting efforts, I'm going to tread lightly here while making a couple of points about investor expectations.

As has been the case for most of the year, most investors cheered Tuesday's announcement that the company was cutting its workforce by a net figure of 10,000 people, or 15% of its worldwide headcount. I say "net figure" here because, while the company does plan to eliminate 15,000 jobs, management said another 5,000 will be created as Alcatel-Lucent continues with its restructuring efforts.

It is not yet clear in what capacity these new jobs will strengthen the company, but people close to the situation suggest that ALU plans to shift resources out of legacy technologies, such as the older-model wireless equipment, and begin to focus more on better growth opportunities such as Internet routing.

Again, I don't have an issue with this strategy per se, but ALU is just now beginning to focus on a market in which rivals like Cisco ( CSCO), Juniper ( JNPR) and Ciena ( CIEN) already have meaningful leads. This has been my biggest issue with ALU: While it's true that the company's near-term cash breakeven point will be achieved more quickly, it doesn't address the company's long-term ability to compete in new end markets like the cloud and software-defined networking.

What's more, for a company that's behind in so many categories, I don't understand how investors can continue to applaud ALU's cost-saving measures as management insists on ignoring the importance of market share. In that regard, given that the stock has climbed close to 180% year to date suggests that expectations for this company have grown way too high. Investors will disagree with me on this, but I believe ALU's cost reductions only look good on paper.

Another thing that concerns me about all of this recent excitement is that, aside from the standard corporate lingo about "trimming the fat" and "bringing more efficiency to the organization," management hasn't exactly been forthright about the company's true intentions. When investments are not being made to grow, the usual thought process involves "let's clean it, to sell it."

Now, I'm just speculating here. These are my words and mine only. But I don't believe for a second that ALU is motivated to operate as a standalone entity beyond 2014. It certainly didn't help that Microsoft just announced plans to buy Nokia's ( NOK) mobile phone business, along with Nokia's strong patent estate, for 5.44 billion euros ($7.2 billion). As good of a deal as this was, strapped for cash, Nokia had no choice but to sell.

As with ALU, Nokia had been in cost-cutting mode for the past 12 months. Today not only is the company more than $7 billion richer, but it no longer has to worry about Apple ( AAPL) and Google ( GOOG) -- that's Microsoft's problem now. ALU investors are betting on a similar deal.

I'm not willing to rule out the possibility of a deal for ALU. However, unlike Nokia, which is cash-flow positive and was riding the strength of better-than-expected Lumia device sales, ALU, which recently posted more than $300 million in negative cash flow, doesn't exactly have the same bargaining chips to play. And the company doesn't expect to be cash-flow positive until 2015.

I don't pretend to know ALU's business better than the company's management. But I do question why the company, which still has a strong patent portfolio, does not commit more funding than what it has promised to research and development, especially since it is playing from behind.

It would make more sense to leverage the company's current assets and patents to produce competing products to fight off the Ciscos and Cienas of the world, especially since the latter has begun to dominate ALU's core optical networking business.

For now, until management shows a clear competitive strategy, I will stay away from this stock. Fiscal awareness alone doesn't make the company any more attractive than it's been. TheStreet Ratings team rates Alcatel-Lucent as a sell.

At the time of publication, the author held shares of Apple.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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