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Technology Stocks : Alcatel-Lucent (ALU) -- Ignore unavailable to you. Want to Upgrade?

To: Sam who wrote (53)	8/14/2011 11:43:25 PM
From: Sam	Respond to of 176

Merrill just came out with a report that lowers their PO by quite a bit, based on the sector and macro events leading to risk averse behavior among investors and ALU's customers. There is clearly no rush to buy the stock, it is a long term story, will have to wait for a better macro economic environment. But eventually, it should sell for quite a bit higher than 3.70. An excerpt from their report: More cautious price objective In our Recession handbook #2 published earlier today we lowered our ALU price objective from €5 to €3.1, a very pessimistic valuation that assumes no restructuring driven margin improvement compared to history, valuing the stock at 0.5x EV/sales, implying a 5% through the cycle EBIT margin. Even after today’s 7% rise there is still almost 20% further upside to this stretch-lo valuation. Defensive end market but high beta stock We believe ALU’s end market is very defensive. Telco spending globally only recently (Q4 2010) returned to growth and network capacity constraints and an absence of 2008’s refi worries means we expect telco spending to continue into 2012. We conservatively lowered our estimates to assume just 2% growth in 2012, and reduced EBIT margin from 7% to 6% (vs 5% in 2011E). Still a believer We still believe ALU’s new management driven restructuring plan will bear fruit, and we like its structural exposure to the IP side of networks where we see the biggest bottlenecks and a very competitive product offering. But we admit that net debt and a large pension fund (where the IFRS liability will likely increase due to lower AA bond rates, though this has no impact on cash flows) are not helpful in uncertain markets. ALU’s CDS has risen and this is likely a stock that will be more driven by market risk appetite than fundamentals near term. So we lowered our price objective to below our long term valuation which would be €5 if ALU discounts a 7.5% EBIT margin, and €7 at 10%.