Investment Management Division

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Dec 12, 2013 (3 years and 8 months ago)

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Investment Management Division


Industry:

Technology, Telecomm





May 3
, 2011

Company
:

Alcatel
-
Lucent



Recommendation:





BUY


Ticker:

ALU





Price:

$
6.49





B
USINESS
D
ESCRIPTION


Alcatel
-
Lucent provides products, solutions, and
transformation services that enable service
providers, enterprises, governments, and strategic industries to deliver voice, data, and video
communication services to end
-
users worldwide. It engages in the development and sale of
software and related servic
es to manage customer interactions over the phone, Web, and
mobile devices. The company offers a software suite that connects customers with the
resources to fulfill customer requests and meet customer care goals. It also provides software
and related serv
ices, which support service provider business priorities in the areas of
application innovation, enhanced communications, digital media, real
-
time rating and
charging, and subscriber data management, as well as offers tools for providers to enable
consumer
s set up and manage their mobile devices and services at home. In addition, the
company provides voice telephony and data networking solutions, and call center software;
and end
-
to
-
end communications networks and individual network elements, as well as
des
igns and sells a suite of radio frequency products, such as cable, antenna, tower systems,
and their related electronic components. Further, it offers consultation, integration, migration
and transformation, deployment, outsourcing, and maintenance service
s. The company was
founded in 1898 and is headquartered in Paris, France.





H
IGHLIGHTS




Consumer Demand for Data
:

With consumers using more data, telecomm companies require
more capacity to handle this demand. Advent of video streaming and newer
technology are
forcing key customers to invest heavily in new data centers, networking & wireless
communication equipment and expanding their broadband network to handle the increased traffic.
ALU has become

the biggest supplier to these customers,.



IT
Spending Recovering
:

Spending from telecomm has stabilized since the financial crisis in
2008.
ALU has shifted their strategy from 2009 to focus more on higher
-
end technology such as
CDMA, fiber optics and 3G/4G networking equipment.

ALU expected IT spend
ing to moderately
increase in 2011, but expects higher margins from newer technology product offerings. While
revenue from 2009
-
2010 dropped from $21.7 billion to $21.5 billion, gross margin increased from
33.6% to 34.8%. It should be taken in to account t
hat currency fluctuation (Euro
-
Dollar) affected
revenue numbers.



Growth Potential in Emerging Markets
:
It currently operates in more than 130 countries.
ALU
has significant presence in Asia
-
Pacific, Latin America, Middle East and North Africa and Eastern
E
urope. (It is currently in charge of all the telecommunication infrastructure for 2014 World Cup
in Brazil).

For 2010, it generated 33.1 of revenue from the US, 31.8% from Europe, 18.3 from
Asia, 8.8% from Latin America.


Investment Management Division






2











I
NVESTMENT
S
UMMARY


Investment Positives

World Leader in Telecomm & Wireless Infrastructure
:

ALU is the industry leader in networking
infrastructure. It has invested heavily in wireless communication and fiber optics technology. It is #2 in
terrestrial optical networking, #2
in
Wave Division Multiplexer (WDM)

which provides long
-
distance
capabilities, #1 submarine optical networking (40% market share), #1 packet microwave transmission.
For wireless, it’s one of the world leading supplier for wireless infrastructure, #1 in CDMA

(39%
market share), #2 LTE (30%). One of the world leaders in IP providers for companies and governments
with a 23% market share.


Highly Diversified:

Began a new strategy in transforming its traditional product offering. It operates
under 3 business segm
ents: Networks, Applications and Services. These services range from providing
telecomm equipment and infrastructure, network and enterprise software and support
services.
It has
also outsourced its IT support services, which reduced operating expenses and

overhead costs.


ALU

has Well
-
established Customers:

49% of its revenue comes from 10 customers. Verizon and
AT&T each account for 11%.
It has long
-
term contracts with many of its clients. For its submarine
segment, a typical contract lasts more than one year. It has 12 contracts to deploy LTE networks which
include AT&T and Verizon, with more than 60 LTE trials in the pipeline.


Investme
nt Negatives

Possible Debt Issue:
Debt interest payments increased from 313 MM Euros to 357 MM Euros from
’09
-
’10. It also issued a 500 MM Euro bond with 8.5% coupon in December 2010. These financing
from debt is due to its restructuring cost it enacted in

2009. Recently, Moody’s cut ALU’s debt rating
52 Week Price Range
$2.25-$6.63
Average Daily Volume (MM)
Beta
2.52
Dividend Yield (estimated)
N/A
Shares Outstanding (MM)
2260
Market Cap (MM)
14740
Institutional Holdings
68.0%
Insider Holdings
4.0%
Book Value per Share(TTM)
$2.33
Debt to Total Capital (TTM)
127.9
ROE (TTM)
-6.1%
Market Profile

Investment Management Division






3


from a B+ to B, citing weakening global recovery and currency risk in Europe. However, ALU has
enough cash to make their debt obligation going into 2011
-
12, with its cash account at $6.8 billion (est:
9.5 bill
ion Euros).


Operating at a Loss:

ALU hasn’t achieved profitability since 2005 as revenue is completely derived
from IT spending and corporate contracts.
Telecomm itself has been stagnant before the Financial
Crisis, and ALU has suffered from it. However,
ALU has managed to stay afloat due to aggressive cost
cutting and shifting towards emerging markets and higher
-
end technology. It was the primary partner
with Verizon in establishing its LTE network in the US. We believe that ALU is in the best position to

take advantage of the exponential rise in data usage from smart phones, tablets and other
communication devices.



I
NDUSTRY


F
INANCIAL
A
NALYSIS


Sales Growth

Sales from 2010 fell in 2010 due to currency fluctuation. Currency conversion had an impact of $(500)
MM. EBIT margin increased from $(993) MMin 2009, to $(415) MM in 2010. Network segment
contributed to 60% of total revenue, Application generated 12% and
Services provided 23%. 46% of
total Network revenue came from its high
-
end technology products, which overall increased 30% from
the previous year.


Earnings

Gross Margin increased from 33.7% to 34.8% as demand increased in the US and Latin America.

SG&A
fell by 1% to 18.2% of revenue. Diluted earnings per share is $(.20), which is a decrease from
$(.32) per share. Currently, ALU has no plans to issue dividends this year.


Cash Flow

ALU generated $1.96 billion in total cash flow, which is the first year they had a positive gain since
2004. Capital expenditure decreased to $928 MM from $991 MM, but we expect CAPEX to be
relatively high to sales as it continues to invest in its new busi
ness segments. Unlevered FCF is $940
MM, which is consistent from 2009 of $947 MM. Cash from debt issuance was a total of $816 MM,
with $522 MM from long
-
term debt. However, it has repaid $384 MM of its long
-
term debt.


Balance Sheet and Financing

It curr
ently has $6 billion in cash with total long
-
term debt of $5.5 billion outstanding.
Short
-
term debt
is $1.6 billion outstanding. It will be likely that it will issue more debt as it continues its capital
investments in facilities and acquisitions. Total sh
areholder equity is $4.7 billion, with common stock
at $6.2 billion.


I
NVESTMENT
R
ISKS



Foreign Exchange Risk

Since ALU is based in France, ALU could suffer if the Euro significantly decreases compared to the US
Dollar.


Dependent on B
ig Customers

43% of ALU’s revenue comes from 10 customers. Verizon and AT&T each count for 11% of ALU’s
revenue.


Long Term Contracts Loose Value

ALU has long term contracts with its major customers. If ALU’s cost rise in the short term they may not
be able to pass th
e cost onto its customers.