Are These Alcatel-Lucent Upgrades a Sign of Life?
However, the debt financing deal has also brought more of the company’s financial problems to light. Alcatel-Lucent does not typically report individual margins for each segment, but the underwriting banks made that a condition of the loan. The slim margins of its terrestrial optics, 17 percent, and its submarine optics, 29 percent, prompted Jefferies analyst George Notte to write in a note on Monday that his firm “didn’t realize that Alcatel-Lucent’s margins were this bad.”
CHEAT SHEET Analysis: Is this deal a positive catalyst for Alcatel-Lucent’s stock?
One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. Even though the company’s stock has risen on the basis of Goldman Sachs and Credit Suisse’s loan and several analysts upgraded the stock on the news, the Motley Fool’s Rich Smith remained cautious in his analysis of the deal. In his commentary, he noted that it was hard to explain the sudden outburst of positive sentiment surrounding the company, especially since “none of the major news outlets that covered the new ratings gave any details on what, precisely, the analysts find so attractive about Alcatel.”
Even if the company improves its gross margins in optics and stabilizes the negative trends in its other business units, Alcatel still faces the difficult economic climate that has caused competitors like Ciena (NASDAQ:CIEN) to report weak earnings this quarter.
Smith also argues that that Goldman Sachs and Credit Suisse’s decision to finance Alcatel does not mean that the company has the ability to turn around its business. While Anders Bylund, another Fool writer, stated that the institutions would not have lent the funds if they did not have good reason to believe that Alcatel would be able to repay the loan, that may not be true. In return for the funds, Goldman Sachs and Credit Suisse had the company pledge its 27,900 patents, worth $6.5 billion, as collateral.
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