Bernstein Sees Potential Default for Alcatel (ALU) if Margins Don't Improve

June 7, 2012 3:58 PM EDT
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Alcatel-Lucent (NYSE: ALU) shares are trading lower Thursday amid some negative comments from an analyst at Bernstein.

The firm's Pierre Ferragu said Alcatel will be facing a "significant margin headwind" should gross margins not rise from first-quarter levels. Ferragu would not rule out the possibility of default on $765 million of convertible debt due around the middle of 2013.

Following the payment, Bernstein thinks Alcatel will be left with about €2 billion in cash.

Ferragu believes Alcatel has a relatively stable footprint in the wireless infrastructure segment, but the "subscale" business will likely continue bleeding money in the future. For example, Alcatel commands 10 percent of the market for stations and wireless equipment, versus 42 percent for peer Ericsson (Nasdaq: ERIC), 20 percent for Nokia-Siemens Networks, a collaboration between Nokia Oyj (NYSE: NOK) and Siemens AG (NYSE: SI), and 18 percent for Huawei, out of China.

Alcatel is also at risk for the drop off of CDMA spending, Ferragu said, of which 34 percent is drawn from North America. As more carriers push for 4G LTE expansion, Alcatel will have limited revenue options in wireless.

Under the best-case scenario with wireless margins at negative 7 percent in 2013 and negative 6 percent in 2014, Ferragu believes Alcatel would still remain profitable on the group basis.

Nortel Networks filed for bankruptcy in January 2010, with about $2.4 billion of cash on the books.

Bernstein rates Alcatel a Market Perform and €1.40 price target.

Shares of Alcatel are now down 0.3 percent in late-Thursday trading.

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