Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock, then decide if Alcatel Lucent SA (NYSE:ALU) fits the bill.
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it’s certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let’s take a closer look at Alcatel-Lucent.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | (2.5%) | Fail |
| 1-year revenue growth > 12% | (7.6%) | Fail | |
| Margins | Gross margin > 35% | 31.2% | Fail |
| Net margin > 15% | 6% | Fail | |
| Balance sheet | Debt to equity < 50% | 114.4% | Fail |
| Current ratio > 1.3 | 1.34 | Pass | |
| Opportunities | Return on equity > 15% | (4.2%) | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 1 out of 9 |
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Alcatel-Lucent last year, the company gave back all but one of the four points it gained from 2011 to 2012. The stock has mirrored that drop, falling about 15% in the past year.
Alcatel has suffered throughout the last year from extremely tough conditions in the telecom equipment space. A weak economic environment in Europe has held back sales there, and major U.S. telecoms AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) have seemed content to defer capital spending on equipment, forcing Alcatel to deal with volatile order flows from its major customers.
Alcatel hasn’t been completely void of success. Its deal in December to sell networking router equipment to Telefonica S.A. (NYSE:TEF) to help the telecom company upgrade its network should be a substantial piece of business, and an agreement with China Mobile Ltd. (NYSE:CHL) to help it roll out its 4G network is a very positive sign in light of Huawei’s rise in the market. Yet competitors Ericsson (NASDAQ:ERIC) and Nokia Corporation (NYSE:NOK) are still dwarfing Alcatel’s market share, and Alcatel has had trouble keeping cash coming in and needed a $2.1 billion credit facility in order to refinance debt and try to reduce its financing costs.
Yesterday, Alcatel released its latest earnings, showing a much larger than expected loss of $0.81 per share for the full 2012 year on a nearly 6% drop in revenue. The stock sank 7% on the news, and CEO Ben Verwaayen responded by announcing that he would step down once the company chooses a successor.
For Alcatel to improve, it really needs to focus on utter survival. With new leadership coming in, now will be a make-or-break time for the telecom equipment maker to demonstrate its ability to keep operating. Otherwise, a sale or reorganization may be in the cards for Alcatel.
The article Has Alcatel-Lucent Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile.
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