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Tickers in this Article: ALU, ERIC, JNPR, CSCO
Back in June, struggling Alcatel-Lucent (NYSE:ALU) presented a compelling contrarian investment opportunity. Indeed, investors who bought some already have something to cheer about - the Paris-based telecom equipment maker's shares are up 40 % since the previous article. The good news is that the gains don't end there.

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The company is still in the early stages of a quiet turnaround, and should be able to capitalize on an inevitable recovery in the telecom marketplace. What's more, the stock continues to trade at an astonishingly low enterprise value-to-sales multiple of less than 0.4 times. By comparison, telecom network kingpin Ericsson (NYSE:ERIC) trades at over 1 times sales.

If that low trading multiple doesn't grab you, then take a look at value hidden away in Alcatel-Lucent's Internet data networking business. (For related reading, check out Analyze Investments Quickly With Ratios.)

This month, the data networking segment delivered some hefty wins. On Wednesday, Alcatel-Lucent inked a "centralized purchasing contract" with China Telecom to provide and maintain an Internet backbone across 10 provinces.The contract is part of a $700 million framework agreement it had signed with the Chinese telecom service giant.

Earlier in August, NTT, Japan 's biggest telco awarded the data networking unit with a major data virtual private networking contract. The deal with NTT, renowned for its tough supplier selection criteria and its cutting-edge projects, could give Alcatel-Lucent a leg-up against rivals Cisco Systems (NYSE:CSCO) and Juniper Network (Nasdaq:JNPR). Meanwhile, cableco Cox Businesses selected Alcatel-Lucent's data router products and services to support its data solutions for its business and carrier customers. The data networking group is on a tear, but what's it worth? Let's be overly conservative and assume data networking growth stays flat and the group produces about -1.1 billion worth of sales this year. If the unit were valued at three times sales, in line with Juniper Networks and Cisco, then it would be worth about -3.3 billion, or 65% of Alcatel-Lucent's total enterprise value.

But consider this: the data networking group only accounts for about 7% of the Alcatel-Lucent's total sales. This suggests that the market is missing the value of the data networking group or it's assigning hardly any value to Alcatel-Lucent's other businesses, notably its wireless and wireline switching units, which are poised for reasonable growth once telecom carriers start spending again. Whatever the reasons, the stock certainly looks undervalued.

The Bottom Line
It's not to be suggested that Alcatel-Lucent should trade in line with the likes of Cisco, Juniper or even Ericsson. Owing to its troubled past, the shares deserve to be priced at a discount - but nowhere near as deep as where they are trading today. (For more, see Dial Up Choice Telecom Stocks.)

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