Deutsche Bank Raises Alcatel (ALU) to Buy; Has Solid Ingredients for Trunaround

April 4, 2013 7:17 AM EDT
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Price: $3.46 --0%

Rating Summary:
    14 Buy, 7 Hold, 6 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 13 | Down: 22 | New: 54
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Deutsche Bank upgrades Alcatel-Lucent (NYSE: ALU) from Hold to Buy, moving its price target from €1.00 to €1.80.

Deutsche Bank thinks Alcatel has the "key ingredients" for a turnaround: "A new CEO with a solid cost-cutting track record, a likely positive revenue and margin inflection in 2013/14 and a termed out maturity profile." In addition, the firm listed four tailwinds which should help Alcel with the effort:
  1. A stabilizing/improving networks revenue environment driven by Capex growth in the US and China and bottoming European wireline Capex;

  2. A positive mix shift to high-margin data capacity additions in the US in 2014;

  3. A further E600m in expected cost savings, equivalent to 400bps of operating margins, with scope for the new CEO to raise this; and

  4. The extended maturity profile following the recent re-financing provides management with sufficient time to follow through on the restructuring plan and potentially refocus the company via asset sales.

Deutsche sees Alcatel hitting EBIT margin targets of 6 percent to 9 percent by 2015, stating, "If we assume Alcatel executes on their targeted Opex savings but only achieves half of the targeted Gross Margin improvement by 2015 (+300bps vs +600bps target), the stock currently trades on only 5 to 6x 2015 P/E. If Gross/Operating Margin targets are reached, Alcatel’s 2015 P/E could be as low as 2 to 3x." The firm sees at least 2 to 3 points of gross margin improvement by 2015 and notes that even if Alcatel misses gross margin targets of 35 - 37 percent and only hit 33 percent, "the stock would trade on a very low 2015 P/E of 5-6x. If Alcatel managed to achieve the low end of its target GM range (35%) the stock would trade on 3.5x P/E, and on 2.5x P/E if it managed to achieve the high end of the GM range (37%). In essence, even if management missed the low end of its GM target, the stock would still be attractively valued."

Shares are indicated for a higher open Thursday.

For an analyst ratings summary and ratings history on Alcatel-Lucent click here. For more ratings news on Alcatel-Lucent click here.

Shares of Alcatel-Lucent closed at $1.28 yesterday.

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