Something very strange is happening in the world of networking and data communications players. The earnings miss and earnings warnings out of Cisco Systems Inc. (NASDAQ: CSCO) present two interesting takes. First off is that Cisco’s woes may not be over, though it could make this the biggest value stock of all Dow Jones Industrial Average stocks. The second is that the turnaround from Alcatel-Lucent S.A. (NYSE: ALU) could get yet another boost at the expense of Cisco.
Alcatel-Lucent S.A. (NYSE: ALU) shares were trading 3% handily lower on Monday, so do not read this to be any short-term trading idea. Ditto for the cheap call in Cisco.
Why Alcatel-Lucent could win here is simple enough. Chinese orders were soft at Cisco on the Snowden effect. After calls and revelations of so much spying activities taking place by the NSA and other agencies, does it seem unfair or outside of the realm of possibilities that the Chinese might want to look elsewhere for networking equipment?
Readers need to keep in mind that U.S. government hardware orders have been limited in the past. In fact, a buyout of 3Com by Huawei was blocked even though 3Com was on the way down. MarketWatch said in March of 2008:
In a written statement, Bain said it was informed by an affiliate that it has decided to terminate the deal after learning that an inter-agency government committee planned to block the transaction. As part of the deal, Huawei Technologies — the largest network equipment maker in China — would have taken a minority stake in 3Com.
As far as how this benefits Alcatel-Lucent, a lot depends on how much it wants to keep rather than jettison in its turnaround. The company’s new focus aims to shed more jobs and to focus on advanced communications. Alcatel is the French company, but Lucent was American before the merger. Now the company is based in Paris. Would the Chinese treat the French parent different than a U.S.-based Cisco? Maybe.
Seeking Alpha tried to run a sum of the parts analysis, but we would point out that this is no easy task (even for turnarounds) comparing valuations when Alcatel-Lucent has lost so much money and is expected to still lose money through 2014.