Will the Fiscal Cliff Sink Alcatel-Lucent?


With the U.S. economy primed to go over the fiscal cliff like a barrel over Niagara Falls, it is time to prepare for the impact. Economists, including those at the Congressional Budget Office, believe that this eventuality will likely cause a severe recession, costing as many 2 million jobs. While economic hardships are not what we would hope for, recessionary pressures may represent the type of opening needed in the enterprise space that would allow Alcatel-Lucent to get back in the game. If the entire industry begins to see headwinds, just as Alcatel has solidified its cash position with the $2.1 billion financing from Goldman Sachs and Credit Suisse , it may allow the company to build on recent momentum.

Alcatel's recent wins
In addition to the recent funding agreement, Alcatel is building on victories with two major U.S. wireless providers that should position the company to compete with both Cisco Systems and Juniper Networks . Last August, Sprint-Nextel announced that it was going to deploy Alcatel's lightRadio technology to bolster coverage in high-traffic areas. The move was, in part, inspired by the rapidly spreading popularity of 4G LTE coverage and the company's ability to aid wireless carriers in quickly enhancing their coverage areas.

As far back as May, Verizon Wireless said it would become the first major service provider to deploy Alcatel's core router system, the 7950 XRS, which competes directly with the offerings of Cisco and Juniper. Verizon already uses Alcatel edge routers, and said that, in addition to the speed, "consistency between the 7950 and other Alcatel products already in its network will make it easier to integrate the 7950 than another vendor's router might have been." As partners continue to see deep value and competitive advantage in Alcatel's products, the company is well positioned moving forward.

Caution advised
In a recent report, Craig Galbraith quoted Saibus Research, which stated, "When we take in account the mixed picture for telecom equipment demand in the U.S. marketplace and combine it with a weak macroeconomic environment in Alcatel-Lucent's home market of Europe as well as a potential recession in the U.S. due to the 'fiscal cliff,' we believe that there is still a significant level of risk and volatility in Alcatel Lucent's shares." Galbraith notes that Alcatel competitors Nokia Siemens and Ericsson have faced similar weakness in both the European and global markets.

Over the last five years, where Alcatel is down over 80%, Ericsson is down less than 15%. Even in 2012, and despite the recent price run for Alcatel, Ericsson is down only 4.1% relative to the 20.6% that Alcatel has fallen. Essentially, Alcatel's shares have been so depressed that significant upside performance from current levels would represent only a small retracement to previous levels. There is clearly risk involved, but the upside seems to warrant an allocation.

ALU Chart
ALU Chart

ALU data by YCharts.

The role of the cliff
While there seems to be concern as to Alcatel's ability to book near-term sales , the fact that the company has addressed its debt issues gives it some real breathing room that should allow it to weather the storm. A U.S. recession will create a significant headwind for the entire industry, but Alcatel's recent struggles have forced the company to address many issues already. It should be safe for several quarters, which will allow the company to follow on its cost restructuring plan. Overall, the company looks to have solid medium and long-term potential, meaning that the issues created by the fiscal cliff may be worse for its competitors. As such, Alcatel is a speculative buy against the looming fiscal cliff.

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The article Will the Fiscal Cliff Sink Alcatel-Lucent? originally appeared on Fool.com.

Fool contributor Doug Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Cisco Systems and Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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