Alcatel-Lucent Junk Status at S&P May Get Worse (ALU, CSCO)

The focus for networking and communications equipment this week was supposed to be all about Cisco Systems Inc. (NASDAQ: CSCO). That may be true the rest of the week, but a call from Standard & Poor’s on Alcatel-Lucent SA (NYSE: ALU) is grabbing the headlines this Monday.

Standard & Poor’s already rates the troubled networking giant with a low rating down at B, and that is for its long-term and short-term corporate credit ratings. At issue are many items, but S&P said that it is now widening out its cashflow losses in 2012 and 2013 to levels worse than previously expected. Today’s report even indicates the company’s cash balance will deteriorate further.

The negative outlook by S&P notes that a one-notch downgrade could be expected in the next six-month to 12-month horizon. A key negative is calling for cash flows to be negative by 650 million to 700 million euros in 2012, and with operating margins to only improve to about 3% out in 2013, after near breakeven margins in 2012. Revenue growth is only expected to be in the low single-digits in 2013, after a close to expected 3% decline in 2012.

If there is any good news at all here it is that S&P is at least looking for seasonally stronger demand in the second half of the year. The problem with this is simple enough: What if the company continues to disappoint as it has for so many years? Maybe a second bit of good news is that this was not a formal downgrade.

Cisco shares are down almost 1% at $17.39 but Alcatel-Lucent shares are down 2% at $1.18 after the first hour of trading today.

If you want to see just how wide Alcatel-Lucent’s problems are, the market cap verses sales says it all: Alcatel-Lucent’s market cap is almost $3 billion versus expected sales of about $18.4 billion this year, while Cisco’s market cap of $93 billion is versus expected sales of almost $46 billion this year. In short, the French dog is worth only about one-sixth of its revenues while Cisco is worth twice its sales.

JON C. OGG