Credit: The 2006 merger of Alcatel and Lucent has not been great for shareholders, who have seen their stock lose 70% of its value. The good news is that Alcatel-Lucent ( ALU , quote ) has finally posted its first profit. Its stock is up more than 25% over the last week, but are the good times here to stay?
Making a profit is nice. But Alcatel-Lucent has to demonstrate that this is an improvement, not a fluke. After all, Research in Motion ( RIMM , quote ) and ( NOK , quote ) can testify how hard it is to fix an ailing communications company.
Alcatel Lucent's strong cash flow is a good sign, as is the price-to-earnings-growth ratio of 0.92. Legendary investor Peter Lynch considers this the most important measure of a company and its investment potential. A price-to-earnings-growth ratio of 1 is acceptable. By contrast, Research in Motion has a price-to-earnings growth ratio of 1.56.
What's worrisome is that Alcatel-Lucent attributes its profit to " years of cost-cutting ." Sales were actually down, so the company is profiting by saving money, not by building new revenues. It also foresees more cuts this year as it tries to improve its operating margin from 3.9% to 5%.
As the old adage goes, "you can't cut your way to success." Investors interested in Alcatel-Lucent may want to hedge their bets with a broader investment like the First Trust NASDAQ CEA Smartphone ETF ( FONE , quote ). Alcatel-Lucent is just a small part of FONE's holdings.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
