Alcatel: Bernstein Upgrades, Calls For Breakup
Eric Savitz 12/09/2011 @ 10:34AM
forbes.com
Alcatel-Lucent would be worth more dead than alive.
That’s the conclusion of Bernstein Research analyst Pierre Ferragu, who this morning raised his rating on the telecom equipment provider to Outperform from Market Perform, with a target of $2.67, well above yesterday’s close at $1.56. In particular, Ferragu thinks the company needs to be broken into pieces.
The analyst says a review of the company’s balance sheet finds no immediate bankruptcy risk – and finds that the liquidation value of the company is above his target price.
“As it stands, Alcatel Lucent remains in a challenging, but stable position,” he writes. “It is structurally loss making in Wireless (25% of sales), [and] exposed to fundamentally unattractive Wireline and Enterprise segments (27% of sales). But with reasonably safe profits from submarine optics, IP routing and Services, we believe the company is in a position to generate between 1% and 4% operating margins every year going forward, which should turn, over the cycle, into positive cash generation before restructuring costs.”
He notes that the stock is down 70% since its April peak, and contends that fears seem overdone.
“The recent poor cash performance of the company is misunderstood and doesn’t reflect a structural deterioration of the business, in our view,” he writes. “Telecom Equipment is a difficult industry, in which working capital flows in and out as project activity varies. Management unwisely created unrealistic expectations in terms of cash generation, but we don’t see any worrying signs in last quarter’s evolution. We therefore expect cash generation to flip back in coming quarters. Moreover, the 2012 outlook is still relatively stable, and we expect Alcatel-Lucent to break-even in cash next year, excluding restructuring.”
Ferragu says his analysis finds that even taking a cautious view on pension liabilities, a liquidation of the company after bankruptcy would still pay back holders at worst 1.03 Euros a share, and more realistically 2.32 Euros/share. And he adds that “a better unwinding of pension liabilities” could yield an extra 1 Euro a share.
“Consequently, we conclude with a strong call to management and board members for a proactive break-up of the company, which we believe would yield significant upside for shareholders… and probably all other stakeholders (clients, employees and pensioners),” he writes. “Keeping the company as it stands today doesn’t serve anyone’s interest. The evolution of the industry over the last five years … have shown one thing: The ‘one stop shopping’ model that drove the merger of Alcatel and Lucent back in 2006 is a complete failure. Moreover, we believe the timing is good to do so. We see buyers for most pieces of the puzzle.”
ALU is up 8 cents, or 4.8%, to $1.63. |
