What's Wrong With Alcatel Today?
When it rains, it pours.
Alcatel-Lucent (NYS: ALU) just provided an early look at its second-quarter results, and it's not good news. Sales will come in at more than $4.3 billion, or 8% below the Street consensus. That's the good news, if you can call it that. The company also expects a $0.02 operating loss per share, well below the $0.02 profit analysts were hoping for.
Management explains the shortfall as a negative trend in its sales mix. Sales are growing across all regions, and divisions and cost-cutting efforts are paying off, but you know, you just can't control what products those darn customers are asking for.
Alcatel promises a better second half of 2012, but not quite good enough to meet its original full-year guidance.
Some analysts take this warning as a sign of dark times ahead for telecom equipment makers. Deutsche Bank, for example, dropped Alcatel from a "buy" rating to a modest "hold," because the margin pressure from weak product mixes will probably continue. RBC Capital extends that theory to the entire industry, noting that "the lack of inclination to pay more for higher-performance gear" makes telecom network builders grasp their purse strings tightly.
In other words, you could argue that mid-range data switches are plenty fast enough for today's needs, so why splurge on the higher-margin top-of-the-line gear? If this holds true beyond Alcatel's product portfolio, it's bad news for telecom specialists Ericsson (NAS: ERIC) and Juniper Networks (NAS: JNPR) as well. That's why those stocks were sagging today, even as the broader market swung higher.
Of course, none crashed nearly as hard as Alcatel's 20% overnight plunge. At worst, Ericsson fell 1.7% while Juniper notched a brief 1.9% decline -- hardly enough to call it a marketwide panic.
But maybe that's a mistake. These companies don't exactly walk in lockstep, but they do tend to move in the same direction. They all play in the same sandbox, after all. I'd urge Ericsson and Juniper investors to keep Alcatel's warning in mind as all these companies gear up for earnings reports over the next couple of weeks. This could get ugly.
With impeccable timing, fellow Fool Andrew Tonner told you to stay out of Alcatel just hours before this devastating pre-earnings update. He'd also tell you to read our free report on the trillion-dollar mobile industry, because it can help you find some steady winners in this unpredictable market. Grab your copy right now.
The article What's Wrong With Alcatel Today? originally appeared on Fool.com.
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