Do Alcatel-Lucent and China Mobile Talks Signal Further Consolidation in Telecom?

Chris Lau, Kapitall: Alcatel-Lucent may return to the CAC40 after a surging year. Is it time to call up telecom stocks?

The French telecom giant Alcatel-Lucent (ALU) recently ended talks with Nokia (NOK) to merge their cloud networks in what was expected to be a high-profile partnership. However signals are continuing to emerge that after a surging year, Alcatel might not even be sweating it.

The company won a number of expensive contracts with China Mobile (CHL) to fuel the company's 4G LTE network – as well as kicked off a successful partnership with the Las Vegas Metropolitan Police Department to start using the system for safety alerts. Investors will want to keep a close eye on the stock for signs of recovery in stock price and further consolidation in the telecom sector.

​Click on the interactive chart to see monthly returns over time. 

Back to France's top index?

A surge and demand for shares of Alcatel-Lucent could happen if the company re-joins the French CAC40. After the company was removed from the index last year, talk immediately resumed about when it would be added back. Shares are already at a 52-week high, but could find more support in the weeks and months ahead.

Improving financials

Financials for Alcatel-Lucent are also improving. The company cut costs steadily, and refinanced its debt. This made the company's long term debt more manageable in 2013.

Part of this came from cost reduction, as the company cut 10,000 jobs as part of its measure to reduce debt by $1.4 billion. Last year, sales per employee averaged $257,000. This is below Nokia’s NSN unit where sales were $313,500 per employee. When the staff reduction is completed by 2015, Alcatel-Lucent will still have 62,000 employees.

The company still faces tough competition, especially in Asia, thanks to Huawei and ZTE (OTC:ZTCOY).

NYSE-Euronext will look at Alcatel-Lucent’s free-float adjusted market capitalization and trading volume. On the NYSE, the three month averaging trading volume was 23.94 million shares. Its free float will be the 30th largest, according to Reuters.

Click on the interactive chart to view stock prices and quarterly sales over time. 

Analysis

Alcatel-Lucent may see more trading activity and share price support if it is included back on the CAC40. Fundamentals will still matter: asset sales will need to continue and key contracts will need to be won by the company. Progress on its cost cutting will also need to reduce the expense burden on Alcatel-Lucent’s balance sheet.

Alcatel-Lucent is at a yearly high and just reached a share price not seen since July 25, 2011. Momentum could support a further price rise, but investors who missed the rally could wait for a pull-back before establishing a position in the company, or keep an eye on competitors like Nokia.

Do you think that Alcatel-Lucent's moves signal changes in the telecom industry? Use the list below to begin your own analysis. 

1. Alcatel-Lucent, S.A. ( ALU): Provides services that deliver voice, data, and video communication services to end-users worldwide. Market cap at $10.23B, most recent closing price at $4.31.

 

2. Nokia Corporation ( NOK): Provides Internet and digital mapping and navigation services worldwide. Market cap at $29.70B, most recent closing price at $8.06.

 

3. China Mobile Limited ( CHL ): Provides mobile telecommunications and related services primarily in the Mainland China. Market cap at $216.09B, most recent closing price at $54.24.


 

(Written by Chris Lau, a Kapitall Contributor. Disclosure: Author is long on ALU. Stock prices, returns and quarterly sales sourced from Zacks Investment Research.)

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