Alcatel-Lucent Too Optimistic?

French-American telecom equipment provider Alcatel-Lucent (ALU - Analyst Report) is progressing on its restructuring plans by cutting costs and streamlining it management, although the related expenses continue to hurt earnings. We have cut our revenue and earnings estimates for 2008 due to the continued pricing pressure and the geographic mix, as the company competes to grow in Asia based on price.

Telecommunications companies continue to be the largest group in terms of mergers and acquisitions, which has helped Alcatel-Lucent's penetration as companies try and consolidate with a single vendor. The creation of a clear No. 2 behind Ericsson (ERIC - Analyst Report) in the market should help boost the competitiveness of the industry and give Alcatel-Lucent solid positioning to improve its position over the long term.

However, we believe that the company is being too optimistic in its assessment of the timing of the restructuring as it may take a few quarters longer than anticipated for it to regain its foothold in the marketplace fraught with increasing competition.

Despite the setbacks, which also include possibility of a consumer-driven recession in the U.S., we believe the shares have incorporated all the negatives surrounding the company and the industry. We therefore rate ALU a Hold with a target price of $7.50.

Udayan Mukherjee contributed to this report.

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