USA to France: You Keep Alcatel-Lucent, We’ll Keep Cisco (ALU, CSCO)

In the land of telecom and communications equipment and services, perhaps Alcatel-Lucent (NYSE: ALU) is only the second worst company of the last decade of the old one-stop leaders.  At least it has Nortel to point to as the worst.  Alcatel-Lucent has been a disaster for shareholders and today’s latest earnings report is not going to make matters much better.  Back when the Alcatel and Lucent merger was announced there was a huge concern over the advantages that the French company would get because of that massive patent portfolio of Bell Labs.  But it seems nothing can help Alcatel-Lucent.  Things sound good on the surface because of a small profit, but there is very little good news in the earnings report.

The profit was 46 million euros, or $63 million U.S., versus a 3.9 billion Euro loss a year ago.  The one-time gains were from recognition changes on retiree benefits and on a capital gain a non-core business unit sale.  Its adjusted operating profit was 271 million euros, versus a blended estimate of 259 to 261 million euros, down from 297 million euros a year ago.

The 19.9% drop in revenue was to 3.97 billion euros, which was at the lower-end of its own estimates and below revenue estimates of 4.3 to 4.4 billion euros.  One key issue is a drop in orders of older wireless and networking sales and then due to France Telecom cap-ex cuts.  The company showed that its gross profit margin widened by 3.4 points to 36.6%; but the problem is that the operating margins for this year are now seen at 1% to 5% versus 5% previously targeted.  That range was put at 5% to 9% out in 2011.

Cost cuts and job cuts are continuing through next year and the company believes it will have normalized operations by 2011 with expanded margins… and with caveats. The additional cost savings was projected at 300 to 400 million for 2010.    Is that a real normal, or the new normal?  The company claims that the business environment appears to be stabilizing and it is somewhat echoing what Cisco Systems (NASDAQ: CSCO) said last week about recovery seen in 2010.  The difference is that Alcatel-Lucent sees market growth as being flat to up 5% in 2010 due to next-generation network orders.

In Paris trading, Alcatel-Lucent shares were down over 3% but then went to being down 7%.  It is far too early to have any real indications on US ADRs yet.  The ADRs closed at $31.18 yesterday and the 52-week trading range is $1.09 to $4.95.  If these losses hold, New York should have trading around $3.00 or a tad under.

The broader problems here is that the bias has changed in just the last three weeks and that has created a sell-the-news mentality even on good news.  The question is this…. Based on what John Chambers positioned his company for the return of growth, do you want Cisco or Alcatel-Lucent in your portfolio?  Some will say neither, but it seems a hard bet that many would pick Alcatel-Lucent if they were forced to pick one of the two.

Based upon the night and day tone of the two companies, it seems that if you asked John Chambers how Alcatel-Lucent is as a competitor that Chambers would ask,” Who?”

JON C.OGG