2013 was a good year for the
telecommunications equipment industry, especially Alcatel-Lucent (ALU), which
almost tripled last year. Another closely watched company was Cisco (CSCO), a
bellwether in telecommunication equipment. Both of these companies performed
decently in 2013, but Cisco saw some weakness toward the end of the year. The
question remains if they will remain good investments in 2014? The answer
appears to be yes.
Alcatel’s Moves
Alcatel is focusing on the
mobile network market and is selling off non-core assets. In 2013, Alcatel took
various measures to re-build its business on the new path. The company now plans
to be much more focused in mobile networks for ultra-broadband access and
Internet-protocol networking.
Alcatel’s focus on this
market is not surprising as the mobile network market is growing quite fast due
to an increase in mobile subscriptions globally. It is predicted that by the
end of 2014, the number of mobile subscribers worldwide will reach 7.5 billion.
By 2016, this number is expected to hit 8.5 billion. Alcatel plans to focus on
such high-growth areas like LTE and high-speed broadband for revenue growth. At
the same time, it is looking to lower fixed costs by more than 15%, saving a
total of $1.37 billion. This looks like a good strategy as the company will be
able to grow its business in fast-growing areas and also control costs.
Alcatel is shedding non-core
assets and recently sold off its U.S. subsidiary LGS Innovations for $200
million. Now, Alcatel has further plans to sell off its enterprise business.
The potential buyers are Unify GmbH & Co. KG, a Gores Group LLC and Siemens
AG venture. The enterprise business was mainly involved in selling
telecommunication equipment and services and was incurring a loss. By selling
this business, Alcatel enjoys a dual benefit by generating extra cash to
strengthen its balance sheet and disposing of an under-performing asset.
A Big Win
Given these gradual and
on-going improvements, Alcatel-Lucent is all set to witness its first year of
overall profitability since 2011. So, it looks like the company is all set to
enjoy better times in 2014 as well.
Alcatel-Lucent has also
established a stronger footprint in the Chinese mobile market where it has won
tenders for selling LTE equipment to China Mobile. In December 2013,
Alcatel-Lucent was granted the tender for rolling out TD-LTE in China. China
Mobile will be installing Alcatel-Lucent’s metro cells in public areas for its
TD-LTE network. Alcatel-Lucent is now one of the three companies picked by the
Chinese telco to supply equipment for the FDD-LTE and TD-LTE networks.
Cisco and Juniper
One of Alcatel-Lucent’s
biggest rivals is Cisco. The two compete mainly in the router business. The
router market has been dominated by companies such as Cisco and Juniper (JNPR),
but Cisco is facing strong challenges from software defined networking (SDN)
solutions. Also, Juniper is posing a major threat to Cisco with its
software-defined network solutions.
Network up-time in the era
of cloud computing is an important factor to provide quality and zero downtime.
Juniper’s development of “High IQ” networks claims to provide 100% up-time and
it also claims that it can never go down.
With this technology,
Juniper is looking to increase its customer base and bag new clients in various
cloud-centric data centers. Network security is also an important factor and
the “High IQ” based networks are hack proof, enhancing Juniper’s credibility.
But, Cisco’s diversification is what sets it apart from Juniper.
Cisco’s Move Into The
Internet Of Everything
Cisco is also eyeing the
Internet of Everything (IOE). IOE has been revolutionizing our life with smart
homes, cars, drones, and various entertainment devices. According to Cisco’s
research team, 37 billion new things will be hooked on to the Internet in the
next eight years. It is also projected that 2.5 billion people will be new
users of the Internet by that time and Cisco is looking to tap this market.
For example, Cisco
collaborated with New York City to launch an interactive platform to provide
valuable information to the public. This information can be accessed from any
device connected to the internet. This is just the beginning of a new era where
IOE will be transforming the lives of city dwellers.
IOE, as defined by Cisco,
will integrate process, data, and things with networked connections, bringing a
richer experience and relevancy. This will further create a better economic
opportunity for individuals, corporations, and even countries.
Thus, Cisco’s focus on IOE
should help it reap the benefits in the future due to its wide application.
Fundamentals and Conclusion
Both Alcatel-Lucent and
Cisco are looking to maintain their momentum in 2014 while employing different
strategies to do so. As far as an investment in either is concerned, both companies
could prove to be good picks. Alcatel is currently generating a net loss, so
there is no P/E metric available for valuation. However, the company’s cheap
PEG ratio of 0.27 indicates that analysts expect the company to grow at a fast
pace in the future. Analysts expect Alcatel’s earnings to grow 97% next year,
which means that another good year lies ahead.
Cisco, on the other hand, is
a more conservative pick with a P/E ratio of just 12.45. Its PEG ratio is
higher at 1.37, but it also has a juicy dividend yield of 3%, making it a solid
investment. Also, its five-year earnings growth forecast is pegged at 8.4%
annually, but given Cisco’s solid dividend and cheap valuation, it could be a
decent investment. All in all, both Alcatel and Cisco look like good picks
depending on investors’ taste and both could outperform the broad market in
2014.
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