Caution: Not so fast on Alcatel-Lucent shares
Published: December 28, 2010
Time posted: 10:02 am
Dear Mr. Berko: Please tell me about Alcatel-Lucent. My broker believes that the shares could triple in the coming year and wants me to use $10,000 and buy 3,000 shares. What can you tell me about the company, and do you think a triple is realistic? – S.L., Kankakee, Ill.
Dear S.L.: No, I do not think Alcatel-Lucent will triple in l2 months. Alcatel-Lucent (ALU-$2.90) is one of those multibillion-dollar revenue behemoths “that provides products, solutions and transformation services permitting service providers, enterprises, governments, and strategic industries to deliver voice, data and video communications services” to end uses all over the globe.
ALU designs and sells sophisticated software applications, related services and tools for application innovation, data retrieval, transfer and enhancement to priority users requiring real-time digital media management and band storage. ALU simultaneously offers voice telephone, wide area data networking solutions terminating communications networks with individual and variable receptor elements. The company also designs, builds and installs suites of digitized and compressed radio frequency streams within an end-to-end network.
Alcatel-Lucent, with 80,000 employees, is home-ported in Paris, France. And my big problem with ALU is that all its Paris employees speak the French language, which seems to have a different word for everything.
ALU is basically a huge, dinky communications company that has been giving shareholders a dinky performance for years. Then in 2006, Alcatel decided to merge with Lucent Technologies (the prestigious Bell Labs) so now ALU is a $21 billion company that still gives its shareholders a dinky performance. If you want to take a gamble and gambol with ALU, then read on.
Last year, ALU had worldwide revenues of $20.52 billion, a gross profit of $7.33 billion earnings before interest, taxes, depreciation and amortization of $1.01 billion. And after all the myriad tax shenanigans, French connections and expenses, ALU lost $1.15 billion or 52 cents per share.
Meanwhile, Jeffries & Company, a small classy NYSE brokerage with excellent research people, recently placed a “buy” recommendation on ALU, and I suspect others will soon follow. Jeffries believes revenues will grow about 10 percent in 2011 and that earnings next year will come in at 22 cents vs. a l4-cent loss in 2009. ALU has $2.99 in cash per share and free cash flow of $1.21 billion, while the consensus on the Street is that ALU has profitably turned the corner to higher revenues and net income.
RBC Capital Markets, along with Barclays Capital, seems to agree and suggests the stock could trade in the $10-to-$14 range within the coming two years, which is where it traded a few years ago.
Certainly, increasing demand for ALU’s products and services indicate higher earnings and a higher stock price. However, I’m not as sanguine as UBS, Morgan Stanley, Waddell & Reed, Artis Capital, John Hancock and other major shareholders. So I’d rather buy the Lucent 7.75 percent convertible preferred (LUTHP.PK-$855) that pays $77.50 per $1,000 face value, matures in 2017 and has a current yield of 9.1 percent. This $1,000 preferred is rated B3, convertible into 40.3306 shares and is callable at $1,038 until March of 2012, and after that, callable at $1,000.
So rather than buy 3,000 shares of ALU, I suggest you use $4,000 to buy 1,000 shares of the common and $6,000 to buy $6,000 face value of the 7.75 percent convertible preferred.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at email@example.com.