Alcatel Shrs' Plunge Seen Warranted by Pft View,
Sentiment
By Alan R. Katz
PARIS (Dow Jones)--Shares of Alcatel SA (ALA) may benefit from a small knee-jerk bounce in
coming weeks, but analysts said Friday that the French telecom-equipment maker's gloomier profit
outlook and a collapse in confidence in its management warranted the 40% drop by its stock over the
past two sessions.
Whereas Alcatel shares had previously received an extra boost from investor confidence in Chairman
Serge Tchuruk, according to market-watchers, now they're suffering from a reverse distrust effect.
Tchuruk himself hinted Friday at his own loss of confidence in management, saying Friday from
London that "some people (at Alcatel) may have a bad time" as a result of the share-price plunge and
profit slowdown.
Alcatel shares fell 2.8%, or FRF16.00, on the day Friday to end at FRF555.00 as the CAC 40
index shed 1.7%, or 60.04 points, to close at 3465.22 points. The stock plummeted 38% Thursday.
Brokerage firms and investment banks wasted little time in slashing earnings estimates and share-price
targets after Tchuruk warned Thursday that operating profit would fall short of expectations this year
and that the company was being hurt by slowing European telecom investment and by the Asian
financial crisis.
Analysts said Friday they were downgrading earnings-per-share projections by between 20% and
38% for each of the next three years.
Meanwhile, credit-rating agency Standard & Poor's on Friday cut the outlook for Alcatel and its
Alcatel Australia Ltd. unit to negative from stable.
"If you revise profits down each year by 30% to 35%, then shouldn't the shares fall by that much as
well?" asked a Paris-based analyst. "Then you add on that the shares will receive a lower
price/earnings multiple, since there is now a distrust effect."
Many investors were angered that Alcatel waited until presenting first-half earnings before issuing a
warning, particularly because the company only recently completed a share swap by which it took
control of DSC Communications Inc. (DIGI) of the U.S.
French brokerage firm Pinatton cut its 1998 EPS target for Alcatel to FRF28.00 from FRF45.00 and
downgraded its 1999 estimate to FRF38.00 from FRF52.00 and its 2000 projection to FRF53.00
from FRF66.00.
Salomon Smith Barney cut its 1998 estimate to FRF29.63 from FRF44.66, its 1999 projection to
FRF38.12 from FRF55.43 and its 2000 target to FRF51.87 from FRF67.98. Goldman Sachs cut its
1998 and 1999 estimates by 20%, taking them to FRF30.00 and FRF36.00, respectively.
In a research note issued Friday, Salomon Smith Barney analyst Douglas Smith gave Alcatel stock a
12-month price target of FRF750.00 but listed it as high-risk. "The high-risk rating comes mainly
from what is clearly a problem of management credibility," he wrote.
"Much of the (previous) improvement in the share price had been attributed to the strong management
team led by Serge Tchuruk ... (Thursday's plunge) was largely a measure of shattered faith that its top
team could perform managerial miracles," wrote Goldman Sachs analysts Richard Kramer in London
and Mary Henry in New York.
But the distrust runs even deeper. "My opinion is that Tchuruk voluntarily masked this information
from the market in order to complete the DSC deal," another Paris-based analyst said. "Or it could
be that his management team concealed the information from him in an attempt to unseat him."
Analysts said a power struggle may be in progress between Tchuruk and executives loyal to former
Chairman Pierre Suard. Tchuruk took over the top job after a judge in 1995 barred Suard from
taking an active role in managing the group as part of an investigation into fraud and misappropriation
of funds at Alcatel.
Suard was convicted, fined and given a three-year suspended sentence in 1997.
"We've come back to the bad days of 1995 in terms of a lack of investor confidence in management,"
the Paris-based analyst said.
On a more fundamental level, Goldman Sachs said it now expects Alcatel to post operating margins
of 5% in 1998 and 7.3% in 2000, below the company's still-retained medium-term goal of an
operating margin equal to 8% of sales.
Salomon Smith Barney noted in particular that Tchuruk's warning that European telecom operators
were cutting network investment - and therefore switching contracts on which Alcatel had been
counting - was the worst news on Thursday. The investment bank pointed out that France and
Germany alone account for 24% of Alcatel's telecom sales and said it felt Alcatel's profit goals had
been set back by about a year.
Analysts did agree that there's little additional downside to Alcatel shares at this point: They've fallen
61% from their record high in mid-July.
"Telecom stocks that completely lose investors' confidence, such as Motorola Inc. (MOT), tend to
find a floor at about 0.9 times previous year's sales," Salomon Smith Barney said. "For Alcatel, this
corresponds to $19.75" per American Depositary Share
Alcatel's ADSs traded at 19 5/16 at 1659 GMT, up 0.4%, or 1/16, on the day.
Investor lawsuits against or regulatory probes of Alcatel could weigh further on its share price. The
French stock-market regulator has already said it is launching an investigation into the timing of the
profit warning, and analysts expect the U.S. Securities and Exchange Commission to initiate one as
well.
Analysts also said they wouldn't be surprised by a lawsuit from former DSC shareholders. "The U.S.
is a very litigious place, and these people have lost a lot of money in a very short time," said the
Paris-based analyst. "Money could well pay a few lawyers' fees."
When the transaction was announced in June, DSC shareholders were receiving $4.4 billion in
Alcatel stock. By the end of Thursday's session, that stock was worth $1.9 billion.
-By Alan R. Katz; 33-1-5300-0303; akatz@ap.org |
