Q. I don’t know what to think of my shares of Alcatel-Lucent SA. I would like to know if there is hope for the future.
R.V., via the Internet
A. Can this marriage be saved?
French firm Alcatel bought U.S.-based Lucent late last year for $11.6 billion to form the world’s largest vendor of telecommunications equipment. The combined firm takes aim at aggressive competitors such as Sweden’s L.M. Ericsson AB.
Critics have said the deal created a bigger, financially weak company that is using cost cutting and job reductions as its primary strategies.
For example, it intends to eliminate more jobs than the 12,500 worldwide announced in February. There also is a heavy load of Lucent pension liabilities that could cause financial problems.
The company recently issued its third profit warning of this year. Expenses associated with the merger, weak North American wireless sales and declining product prices are taking their toll.
Competitors are making a strong push, sensing the company’s weakness. For example, Ericsson claims to be gaining share in emerging markets.
Two key executives, each once considered a potential successor to Chief Executive Patricia Russo, have left the company. Frank D’Amelio, in charge of integrating the two companies, departed to become chief financial officer at Pfizer Inc. Mike Quigley, in charge of the combined company’s strategy, returned to Australia.
Shares of Alcatel-Lucent (ALU) are down 28 percent this year following last year’s 15 percent gain and a 21 percent drop in 2005.
Investors hope this is a transition year and things will improve. Alcatel-Lucent remains one of few giant, diversified telecom-equipment vendors, and Russo expresses confidence that the merger will improve profit margins. It is the global leader in broadband access equipment.
The consensus rating of the company’s stock by Wall Street analysts is midway between “buy” and “hold,” according to Thomson Financial. That consists of six “strong buys,” one “buy,” nine “holds,” two “underperforms” and one “sell.”
It isn’t standing still. The company received a $400 million contract from Reliance Communications Ltd., one of India’s largest mobile phone companies, and a $100 million contract from Hits Telecom in Uganda. It was part of a group of companies that won a $20 billion contract with the U.S. government to develop a communications network for federal offices.
Earnings are expected to decline 52 percent this year and rise 168 percent next year, according to Thomson. The five-year annualized return is projected to be 11 percent.
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney @tribune.com.