Seeing Value in Lucent-Alcatel: Goldman Sachs Raises Ratings

Goldman Sachs is raising its rating on troubled network and telecom equipment giant Alcatel-Lucent (ALU-NYSE/ADR).  The firm raised its official rating to a BUY from NEUTRAL, and shares are up more than 2% pre-market on more than 100,000 shares.

Goldman ays it believes that the company’s order recovery meaningfully improves the risk-reward and noted a book-to-bill ratio of 1.3 at the end of Q1.  The report gives a 16% upside based on higher sales volumes boosting margins and as restructuring benefits materialize in the second half.  Goldman also believes that downside much lower than current prices is limited even if near-term earnings disappoint. In short, they think the bad news is baked in.  Investors believe the company can achieve greater than 10% EBIT margins.  Goldman is raising its sales and earnings forecasts, and expects solid guidance with earnings in May and potentially positive news at the June 11 strategy announcement.  Goldman also notes that execution is a risk on aggressive pricing or that it doesn’t meet cost cutting initiatives.

ON a dollar-adjusted basis, Goldman is raising current fiscal targets from $0.18 EPS to $0.26 EPS and next fiscal year targets are raised from $0.86 EPS to $0.99 EPS.  Based on the writing and British Pound comments, this report looks like it came from overseas coverage.  The ADR’s are at $13.45 pre-market, up from the $13.16 close yesterday; its 52-week trading range since the merger completed is $10.63 to $15.60.

Jon C. Ogg
April 25, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.