Analyst: Alcatel-Lucent has 'key ingredients' for a turnaround

Analysts at Deutsche Bank is revising its view of Alcatel-Lucent, and think the vendor now has the "key ingredients" for a turnaround, helped by the appointment of a new CEO with a track record for reducing costs. 

Deutsche Bank also highlighted a likely positive revenue and margin shift this year and next, according to Street Insider. The investment bank lift share price target from €1.00 to €1.80, and rerating the shares from hold up to buy.

The analysts think that the struggling infrastructure vendor will be boosted by four important moves: the stabilisation and improvement in network revenues helped by growing capital expenditures from operators in the United States and China; a shift to more high-margin upgrades to boost data capacity in the U.S. market in 2014; further expected cost savings of €600 million; and the recent re-financing allowing the company's management adequate time to restructure and refocus.

The German bank believes Alcatel-Lucent will report at least 2 to 3 percentage points of gross margin improvement by 2015, and notes that even if the company misses its gross margin targets of 35 to 37 per cent and only hit 33 per cent, "the stock would trade on a very low 2015 P/E of 5x to 6x."

"In essence, even if Alca-Lu management missed the low end of its gross margin target, the shares would still be attractively valued," Deutsche Bank said.

Alcatel-Lucent's new CEO Michel Combes is expected to accelerate the company's €1.25 billion cost-cutting plan, which includes 5,500 job cuts, a labour union source told Reuters late last month. Combes' predecessor, Ben Verwaayen, was criticised for not pushing ahead quickly enough with a major cost-cutting plan and failed to deliver a promised turnaround in his five-year-long tenure as CEO.

Following a meeting with the new CEO, the union leader said Combes would take his time to decide on what Alcatel-Lucent units might be sold off, having gained a lifeline after agreeing to a controversial €2 billion funding package in January. "Michel Combes explained that it was imperative to go more quickly on the plan to cut jobs," the union source told Reuters, who declined to be named because the talks were internal.

For more:
- see this Street Insider article

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