Improving Credit Outlook at Alcatel-Lucent

By Jon C. Ogg Published Nov 17, 11:10AM EST

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Alcatel-Lucent S.A. (NYSE: ALU) is one technology and communications infrastructure player with a turnaround that feels like it just never really ends. That being said, Moody’s likes what it sees on the corporate credit ratings front. The ratings agency has not formally upgraded the ratings, but it has given a positive outlook on Alcatel-Lucent.

Moody’s Investors Service announced on Monday that it had changed the corporate family ratings of Alcatel-Lucent to positive from stable on its B3 corporate family rating and B3-PD probability of default rating. This effectively affirms the group’s existing instrument rating of Caa1 for outstanding convertible notes and B3 for its senior unsecured ratings.

Moody’s said:

The positive outlook reflects our view that Alcatel-Lucent’s credit metrics could improve following the company’s stronger-than-expected results in the last nine months. Moreover, if Alcatel-Lucent is able to sustain the ongoing improvement in operating margins and cash flow generation, we could consider upgrading its ratings over the next 12-18 months.

Despite Alcatel-Lucent’s persistent negative profitability and large negative free cash flows, Moody’s change to positive reflects Alcatel-Lucent’s improving results in the past 12 months and a period of improved expectations over operating performance and cash flow generation over the next year. Moody’s said on adjusted levels:

Moody’s currently expects Alcatel-Lucent’s operating margins to improve towards mid single digits over the next 12-18 months but its free cash flows to remain negative, albeit at a reduced level.

Alcatel-Lucent ADSs in New York have been stuck. Some of the weakness has been tied to a weak euro currency, but at $3.11 its ADSs have a 52-week range of $2.28 to $4.68.

24/7 Wall St. has talked about the valuation conundrum of Alcatel-Lucent on more than one occasion as well. Alcatel-Lucent trades at less than 0.5 times past revenues, versus almost three times past revenues for Cisco. That margin differential, along with expected and historic earnings, makes all the difference in the world on how these two giants are valued.

Alcatel-Lucent is still fairly deep into “junk bond territory” as far as credit ratings are concerned. That could be the case for many years to come.

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About the Author Jon C. Ogg →

Jon Ogg has been a financial news analyst since 1997. Mr. Ogg set up one of the first audio squawk box services for traders called TTN, which he sold in 2003. He has previously worked as a licensed broker to some of the top U.S. and E.U. financial institutions, managed capital, and has raised private capital at the seed and venture stage. He has lived in Copenhagen, Denmark, as well as New York and Chicago, and he now lives in Houston, Texas. Jon received a Bachelor of Business Administration in finance at University of Houston in 1992. a673b.bigscoots-temp.com.