Tuesday, I wrote an article entitled, “Cutting Costs Should Not Be Part of This Company’s Plan!” after a report that Alcatel Lucent SA (ADR) (NYSE:ALU) was backing out of its original plan to divest assets as part of its restructuring strategy. This strategy has created gains of more than 100% since November 2012, yet on Tuesday, the stock fell 1.5% as rumors of this strategy falling apart hit the market. Turns out, these “rumors” were correct, and now Alcatel Lucent SA (ADR) (NYSE:ALU) has backed out of its original plan.
Insanity at its best
My first article showed how “cost-cutting” is a bad idea for Alcatel Lucent SA (ADR) (NYSE:ALU). Why? The company has done nothing but “try” to cut costs for the last five years, laying off more than half its workforce and losing 70% of its stock value. Yet, for some reason, the company believes this plan will work.
On Wednesday, the company announced that it intends to cut costs by $1.25 billion and sell another $1.25 billion worth of assets within two years. Furthermore, the company plans to slash $2.5 billion in debt via selling its stock and additional asset sales.
Incredibly, Alcatel Lucent SA (ADR) (NYSE:ALU)’s stock traded higher by 3.2% on this insane proposition. The original plan was to trim its inefficient segments, those producing losses, and then focus on its growing and profitable segments. This would have been much more beneficial to shareholders.
What is the company telling you?
This is a real simple scenario, as the company is telling us three things.
First, there is severe separation within the company as to its direction. Aside from Ben Verwaayen’s resignation as CEO from Alcatel, just shortly after the announced “plan,” the company’s CFO, restructuring advocate, Paul Tufano is now leaving! He has been very vocal in his support of the original restructuring plan, saying it would cost $625 million this year but that major moves would occur. The company’s board, compiled of those from both the original Alcatel and Lucent, have been disconnected since the merger in 2006, and apparently have removed everyone who still supports a leaner and meaner Alcatel Lucent SA (ADR) (NYSE:ALU).
Second, the $2 billion financing was worthless. Alcatel took $2 billion from Goldman Sachs and put its patents up as collateral. Now, the company is aiming to pay off $2.5 billion in debt (Goldman loan), with stock. Essentially, the company is preparing us for financing, or public offerings, indicating that it has no use for the $2 billion as part of a large restructuring program; and that it will dilute shares to pay off the debt.
Third, all of its “asset sales” are already accounted for and priced into the valuation of the company, as they have no plans to make any substantial moves. Keep in mind, the sale of its submarine optical unit for $1.1 billion has already been reported back in January. It hasn’t yet occurred, but judging by the company’s goal of selling “$1.25 billion worth of assets,” it does appear to be the $1.25 billion submarine segment. Thus, no further changes should be expected from this near bankrupt company, which refuses to make substantial changes.
There is so much upside with the original plan
This new “plan” is bad in every way, with the company’s only “plan” to cut more costs and raise more money. It is the quintessential example of insanity: Doing the same thing over-and-over and expecting a different result.
This is a company that posted quarterly sales of $4 billion last quarter, operates in six segments, and four of those segments saw significant growth of more than 5% year-over-year. In other words, Alcatel has about $2.7 billion worth of quarterly sales that is growing at a combined 8% year-over-year rate, nearly $11 billion in annual revenue. The remaining $8.5 billion in annual revenue weighs on the company and pushes operating margins to just 0.37%.
On Tuesday, I compared Alcatel Lucent SA (ADR) (NYSE:ALU) to Cisco Systems, Inc. (NASDAQ:CSCO) and Ericsson (ADR) (NASDAQ:ERIC) in an attempt to show Alcatel’s potential value. If Alcatel would focus on the growing $11 billion in annual revenue, it would be growing faster than either Cisco or Ericsson. Just look at how it would compare if it would eliminate all of its garbage.
| Alcatel-Lucent | Cisco | Ericcson | |
|---|---|---|---|
| Revenue | $11 billion | $47.88 billion | $34.35 billion |
| Revenue Growth | 8% | 5% | 2% |
| Price/Sales | 0.40 | 2.77 | 1.14 |
| Operating Margin | 6% | 22% | 8% |
If Alcatel would cut its unprofitable and declining segments, it would no longer be the black sheep of the telecom equipment industry, and significant upside would still exist. It would be a fast-growing company and would still be cheap compared to sales. In fact, because of its presumed growth and its profitability, I think it could trade at the same premium as Ericsson (ADR) (NASDAQ:ERIC), or a near 200% premium to its current price. Because let’s not forget, with the sale of assets, Alcatel could cut debt which would likely be greatly rewarded by Wall Street.
Conclusion
At this point, Alcatel can not compare to the operating efficiency of either Ericsson (ADR) (NASDAQ:ERIC) or Cisco Systems, Inc. (NASDAQ:CSCO), nor is it willing to try. Both Cisco Systems, Inc. (NASDAQ:CSCO) and Ericsson have grown from the ground up, and continue to gain market share in several of Alcatel Lucent SA (ADR) (NYSE:ALU)’s segments; as Alcatel has little money to invest in its growth. Therefore, Cisco and Ericsson remain market leaders, and great investments, while Alcatel is left in the dust selling its same old story.
In my opinion, the company made a horrible mistake by choosing to continue with operations that has led to its decline. As a result, those who had a plan have left, the only planned sale is already priced into the stock, and we can expect more of the same from a highly disappointing company.
The article You’re Being Sold the Same Old Story, I Wouldn’t Buy It originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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