ALU: Deutsche Cuts to Hold, Cash Burn a Concern (Update)
By Tiernan Ray
Shares of Alcatel-Lucent ( ALU) are down 25 cents, over 18%, at $1.12, after the company warned this morning it will have an operating loss for Q2, when analysts had been expecting a profit, because it wasn’t able to shift its “mix of business” in the quarter.
The company expects to report full results on July 26th.
The stock has received one downgrade so far this morning, with Deutsche Bank‘s Kai Korschelt cutting his rating on the shares to Hold from Buy. The projected €40 million operating loss compares to his estimate of a €58 million operating profit in the quarter, which, he writes, was more or less in line with consensus.
Things are not going to get better rapidly enough to avoid some burning of cash, writes Korschelt:
We believe current mix/margin pressure coupled with further revenue uncertainty from Europe means that H2 margin improvement will not be enough to offset the weak H1. Based on our preliminary impact on consensus estimates, we could envisage operating margin deterioration for FY12 from current 3% consensus to around breakeven to 1%. We believe this will increase cash burn and materially impacts earnings visibility for the company.
Alcatel’s report could conceivably have positive implications for competitors such as Cisco Systems ( CSCO), Ericsson ( ERIC), and Nokia‘s ( NOK) Nokia-Siemens business, although I’ve yet to see details to that effect from the Street this morning.
Update: Other folks on the Street have weighed in as well:
Mark Sue, RBC Capital: Reiterates an Underperform rating and a $1 price target. “Carriers around the world are seeing a surge in data traffic growth, but it’s not translating into much of anything positive for equipment vendors [...] With weaker demand due to macro conditions, increased competition impacting pricing and deteriorating operating margins in the industry, we’re estimating 0% OMs for CY12.”
Pierre Ferragu, Bernstein Research: Reiterates a Market Perform rating and a $1.85 price target. “While the company didn’t share details, we believe
that gross margins likely ended up slightly below our expectations, and ~2pts below consensus expectations. This suggests that gross margins recovered only marginally from 1Q12 levels, and gives credence to potential risks of structural headwinds on gross margins from declining CDMA revenues and increased competition in IP routing.”
Stuart Jeffrey, Nomura Equity Research: Reiterates a Neutral rating and a price target of €1.27 on the ordinary shares traded in Paris, which today are down almost 20% at €0.91. “The scale of Alcatel-Lucent’s Q2 revenue miss is, in our view, not significant (just a 3% miss) nor surprising given pre-announced
weakness at Acme Packet, Adtran and Calix as well as weak capex data
points out of China and Europe. Liquidity issues back in focus We continue to believe that Alcatel-Lucent needs to generate mid to high single-digit operating margins in order to become sustainably cash generative. Guidance now implies that the company may struggle to meaningfully exceed breakeven. With no clear sign of an imminent improvement in the spending environment we expect liquidity issues to remain in focus for Alcatel-Lucent. While no near-term liquidity crisis appears likely, the company has few remaining assets to sell and thus the longer-term outlook remains challenging, in our view.” |
