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Packet inspection/traffic management

Short Shift: Analyst Doubts AlcaLu's Cost-Cutting Ability

Entering 2014, Alcatel-Lucent (NYSE: ALU) looked like the living definition of a rebounding company, having seen its stock price more than triple in the past year, while making progress selling non-core properties and reducing costs under its much ballyhooed Shift Plan.

Yet, one analyst expects the company to achieve less than two-thirds of its Shift Plan goal of €1 billion (about $1.34 billion) in cut costs by 2015.

George Notter, managing director of equity research for communications infrastructure at Jefferies & Co. Inc. , writes in a research note that the vendor's cost savings goals are "aggressive," and, "We expect the organization to fall short of the €1 billion target."

Notter notes that current Wall Street expectations are for Alcatel-Lucent's cost reductions to fall more in the range of €795 million by next year, but he's aiming even lower.

"Our model assumes the company generates roughly €650 million in cost savings with operating margins running from a normalized 0.1% currently to 4.9% in 2015," Notter writes. "By our estimates, most of the improvement comes from better execution of the business (per our analysis of margin structures at industry benchmark companies)."

Notter's take is that poor management execution was largely at fault for historically poor margins, though he believes that there is, under newish CEO Michel Combes, "room for margin expansion based on better management of the business." However, he also says the vendor's diversity of products and of customers could work against its ability to become a more streamlined organization.

Comparing Alcatel-Lucent's Shift Plan to the massive cost-cutting efforts of another vendor giant, Nokia Networks , Notter writes, "In particular, we believe that Alcatel-Lucent's significant customer relationships across a myriad of major product categories will prevent them from ultimately getting as narrowly-focused as NSN. As such, we expect their upside scenario on operating margins to not be as high as NSN's."

That said, Notter believes Alcatel-Lucent is "headed in the right direction... Combes is shaking up the business and refocusing the organization on what's most important -- profitability and cash flow... Employee morale has improved significantly and they're winning new deals globally."

However, that still doesn't add up to as positive a story as Notter would like to see.

Alcatel-Lucent will report its fourth quarter and full year 2013 financials on Feb. 6.

Combes announced the Shift Plan last summer, and, in the last half of 2013, the company moved fairly quickly to act on some of its goals. It sold its LGS Innovations government-focused unit, and reportedly has been looking to sell its enterprise business. It also announced plans to cut 10,000 jobs by the end of 2015. It recently transferred about 170 jobs to a French engineering firm.

For more on Alcatel-Lucent's recent developments, see:

— Dan O'Shea, Managing Editor, Light Reading

DOShea 2/4/2014 | 10:18:13 AM
Stock price To be clear, almost tripling from around $1.50 a share at the open of 2013 to around $4.60 at the end of the year is something, but still left ALU well behind many other similar companies on the market. Notter's latest rating, to go along with the tone of his note, is "underperform."
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