Alcatel Lucent SA (ADR) (ALU): Is “The Shift Plan” the Answer?

Cisco Systems on the other hand, has embarked on acquiring small companies, with a focus on those that develop 4G LTE (Fourth Generation Long-term evolution) networks in a bid to boost its competitive advantage over its rivals. 4G LTE is a high speed data and broadband connectivity network for mobile phones and data terminals.  broadband and network companies are developing these high speed connectivity networks to match the increasing demand for smartphone users. Cisco Systems acquired Broadhop last year December 18 aimed at boosting its competitive advantage in the 4G LTE networks. The company aims to integrate Broadhop’s widely deployed policy control solutions for mobile and fixed networks.

Performance and valuation

Alcatel-Lucent is the smallest in terms of market cap, among the three companies, with just $4.25 billion, compared to Cisco System’s $132.65 billion and Ericsson’s 39.25 billion. The company also trails the rest in terms of gross margins with 30%, just two percentage points below Ericsson’s and miles behind Cisco Network’s 61%.

Alcatel-Lucent’s trailing 12-month operating margin is flat at 0%, compared to Cisco’s 22%, and Ericsson’s 8%. Cisco is the only profitable company with EPS of $1.80 for the trailing twelve months (TTM), which is the annualized financial results for the company’s last four fiscal quarters. On the other hand, Alcatel-Lucent and Ericsson losses stand at $1.21 per share and $0.09 per share respectively.

However, in terms of earnings growth-based valuation, Alcatel seems to be the cheapest stock. At $1.87 per share, Alcatel-Lucent trades at 0.27 times in PEG ratio, as compared to Cisco’s 1.49 and Ericsson’s 0.53.

The bottom line

Alcatel-Lucent’s fundamentals go straight at the bottom if I were to rate the three companies.

However, based on the company’s growth prospects, and “The Shift Plan”, there is a huge upside for stock.The upside will depend on how effectively the company implements the shift plan. It needs to cut costs and reduce the huge amount of debt attached to its balance sheet. The concentration in high growth business units will also guarantee increased revenues and margins.

Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems.

The article Alcatel-Lucent: Is “The Shift Plan” the Answer? originally appeared on Fool.com and is written by Nicholas Kitonyi.

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