Alcatel-Lucent (ALU) reported weaker-than-expected revenues for the second quarter of 2008 and its earnings were additionally hit by restructuring charges of 265 million ($414 million). The company is progressing on its restructuring plans by cutting costs and streamlining layers of management although the related expenses continue to drive earnings lower.
While the company is the market share leader in several categories of telecom equipment (including DSL gear), we are concerned about the pressure on operating margins due to the challenging competitive environment, the recent softness in pricing, and the short-term disruptions from the Alcatel-Lucent merger that appear to continue.
In the long term, this merger is positive for Alcatel-Lucent, although it will take several quarters for the synergies to be realized and we believe that the market's expectations are for the integration and consolidation to go smoother than we expect. These types of mergers take several quarters before earnings growth is restored, and we believe the added cultural problems of a large US-based firm with a France-based firm may also cause disruptions.
We have maintained our revenue and earnings estimates for remainder of 2008 although we are concerned about the continued pricing pressure and the geographic mix of growth as the company competes to win business in Asia based on price. The stock is trading at 51.2x our new 2008 earnings estimate of $0.12. We continue to rate ALU a Hold, and we have fixed our target price at $6.50 per ADR over the next six months, or approximately 0.53x our 2008 sales estimate as we believe that the company is fairly-valued at these levels.
Udayan Mukherjee contributed to the report.
Read the full analyst report on ALU
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