Telecommunications Making a Comeback

I love to start each day with a bit of reading, but, witness the lack of postings, and an even further lack of recommendations, I have been hard pressed to find among my readings something worthy of passing along to readers.  I have one to recommend today.  Some of the good news is already out there, and the stock is enjoying that news.  But there is probably still some juice left in the stock.

The news is regarding Alcatel-Lucent (ALU).  I have been loathe to recommend this stock, which I saw as not having a clear focus and burdened with out-of-date legacy systems as we move out of analog era into the digital era.  It's been one write-off after another.  The reason to recommend the stock is that it got a management change.  Actually, it got the management change in 2008, and that's what has made the difference.

The article, "Hi-Yah!  Alcatel-Lucent Chops Away at Years of Failure!", appears in Bloomberg Business Weeks' May 2-8, 2011 issue.  The central change is the hiring of a Dutch anglophile, Bernardus Johannes Maria Verwaayen.  Ben started at ITT, and continued at the Dutch telecom firm, PTT, then joining Lucent in 1997.  He became CEO of BT (British Telecom), and finally, in 2008 he returned to become head of Alcatel-Lucent, replacing embattled Patricia Russo.

Management of Alcatel-Lucent had become so messy and encumbered that his first day on the job, Ben was asked to sign off on hiring a secretary in Poland after 16 levels below had already signed off.  He wrote an email saying, "This ends now.  Hiring from now on is the responsibility of a manager and his or her boss."

Verwaayen Bets on LTE

Another important decision was make a choice on wireless technology, and that appears to have been the correct decision.  He and company bet on LTE, focusing less on Wimax.  Alcatel-Lucent makes equipment for the wireless cell towers and the optical equipment that links them.  Example: it logged a $4 billion 4-year agreement with Verizon Wireless

Alcatel-Lucent Becomes Number 2 in Routers

For those unaware of any but Cisco and Juniper in routers, it turns out Alcatel-Lucent is also a player.  Not only a player, but this year jumped past Juniper to the No. 2 spot, growing from 12% of the market in 2008 to 16% this year.  Alcatel-Lucent's router is able to transmit all of the major data types, making it less complex and less costly than other platforms, yet scalable with the use of "blades."

Slashed Expenses

Well, ALU has been slashing expenses for years but it has slashed another $860 million in expenses since Ben Verwaayen took over.  And, of course, it is necessary to keep expenses down to get close to being the low cost provider that is necessary for economic viability.

Research

It might be worth it to remind readers that Alcatel-Lucent owns Bell Labs, one of the great research laboratories of all time.  It was here that the transistor was invented and won Nobel prizes.  A recent product from Bell Labs is something called lightRadio, which can extend cell wireless coverage without setting up massive cell towers.  So, while Alcatel is concerned about competition from the likes of low-cost providers like Huawei in China.  Huawei does not have Alcatel's Bell Labs providing innovation.

On the Downside

It's been five years since it delivered a full year of profits.  And the good news has already pushed the stock to a double.  So, this advance has to temper your enthusiasm somewhat.  Though if you have a three year or more horizon, the good news is likely to continue.  A warning:  stay clear of all the major telecom networks:  AT&T, Sprint, Verizon and the like.  They are not the utilities of yesteryear.  They are ruled by high tech, and they are encumbered by taxes, and they are currently victims of net neutrality.   Net neutrality is not innocuous.  It permits unfair competition in retail by Amazon, and in telecommunications by the likes of Skype and Google Voice.

So, the government is allowing Skype and Google Voice to get away with stealing business from the major telecoms without collecting taxes.  In the case of Google, whose telephone service is supported by advertising revenue, the question is it really free?  What we know is that while waiting for the government to decide what to do about taxing advertising revenue, Skype has swiped 20% of the international minutes.

Moving on to Other Stuff

I have lost my enthusiasm for Citibank.  While I like Vikram Pandit, and the bank's board of directors decided that it should pay him more than the $1 per year he was making, he failed to generate any excitement in the stock.  Failing to stir enough interest in the stock to get it above the $5 limit that many funds require to buy a stock, he has gone for a 1 for 10 reverse stock split, which I consider a cheat.  And so Pandit appears a bit of a colorless, gray fellow.  Probably fine for the bank, but not so great for investors in the short run.

The stock will probably turn out to be okay over the long term, but there may still be a lot of junk in Citi's loan portfolio.  I can go either way on this one.

Look for Acquisition Targets

The economy looks to bump along.  The best idea I have, in general, is to find acquisition targets.  I didn't have in mind things as big as T-Mobile.  But here's the situation: the stock market is fully valued at 16 times earnings.  But meanwhile you know that there are huge reservoirs of cash on the balance sheets of major companies:  Apple, Microsoft, Cisco, and others.  So I think this is a great year for M&A (mergers and acquisitions).

Actually, I have such an M&A target, which I've been holding for at least six years.  On the downside, it has yet to generate even one quarter of earnings, but I'm not worried, this will happen any time now.  And it has impressive possibilities, and the list of possible targets includes many with big cash in their treasury.  If you're willing to share some of your winnings with me for finding this stock and doing a lot of the waiting for you, write me at tbbarnard@yahoo.com. 

Practical Suggestion 

My email notices are very  uneven.   Some have been miffed I left them out.  Only inadvertently has this ever happened.  I have yet to find a good way to send out these notices.  My advice is to "follow" the website.  Look for this in the right hand column.