Margin hits Alcatel; analysts split on outlook
By Simon Kennedy, MarketWatch
LONDON (MarketWatch) — A sharp drop in margins at Alcatel-Lucent SA’s networks arm was the main driver behind Thursday’s heavy losses for the stock, but analysts appear divided over whether this is a short-term blip or represents a more worrying trend.
Shares of Alcatel-Lucent dropped about 9% after reporting second-quarter results, extending what’s been a poor run for telecom equipment and networking stocks.
That run includes a 21% slump for Juniper Networks Inc. on Wednesday after the group reported falling profits and provided an outlook that missed expectations amid concerns over spending by telecommunications carriers. Read more on Juniper's fall.
On the face of it, Alcatel-Lucent’s results were much stronger. The group swung to a net profit of 43 million euros ($62 million) from a year-earlier loss of €184 million, and revenue rose 2.4% to €3.9 billion, just slightly below consensus expectations.
Adjusted operating income jumped to €108 million from €28 million, but the figure was still 21% below market expectations, according to WestLB analyst Thomas Langer. He said the shortfall was in part due to “striking margin weakness” in the company’s main networks division, which generates the majority of its sales.
The unit’s adjusted operating margin was 1.9% in the quarter — just half the level analysts had forecast.
Chief Financial Officer Paul Tufano said in an interview with MarketWatch that the drop was due to a changing mix of products for Alcatel-Lucent and to increased Asia-Pacific sales, margins for which are slimmer.
He also remained bullish on prospects for the U.S. market.
“The U.S. is a great market for us and we expect to be strong in the second half,” Tufano said.
“If you look at our IP products, they’re gaining share every quarter, and they’re gaining share from some of the competitors who are having some problems,” he added, noting the same is true in other areas of the business.
That confidence meant Alcatel stuck to its outlook calling for an overall adjusted operating margin above 5% in 2011 and for the company to grow faster than its “addressable market.”
After weeks of wobbling over the U.S. debt-ceiling talks, the dollar has stabilized — suggesting it is still the world's No. 1 reserve currency after all.
WestLB’s Langer was skeptical, saying that the outlook “more and more appears as desperate belief against the background of the Juniper Networks sales and profit warning.”
Bank of America Merrill Lynch analyst Andrew Griffin, on the other hand, recommended that investors use any weakness in the share price as an opportunity to buy the stock.
“This looks like a rerun of third-quarter 2010, when margins were weaker than expected driven by strong growth in lower-margin Asia-Pacific countries,” he said in a note to clients.
UniCredit analyst Stephan Haber was upbeat on Alcatel’s chances of hitting its targets.
“Today’s results were weaker than we had expected, but the operating performance continued to improve in the second quarter, despite a moderate gross-margin decline, and the company’s full-year targets seem achievable,” he said. |
