* Shifting into growth mode
While the shares delivered a disappointing return in 2014, we see good buying opportunities as the transformation story looks increasingly credible, valuation is undemanding and upside is significant (+50%).
* From restructuring to growth
After having efficiently executed the first stage of the Shift Plan (refocusing, restructuring and refinancing), Alcatel-Lucent is now ready to move on to the next phase based on innovation, transformation and growth, which is set to
create significant value for shareholders in the medium term.
* Sales gradually accelerating mid-single-digit
Despite uncertain short-term demand in the US (mainly at AT&T), the global market outlook is encouraging for 2015 (potentially up by mid-single digits), driven by positive conditions in China and Europe. We see a bright outlook in core networking (sales up 10% LFL), due to strong momentum in IP routing (market share gains in the edge and the core) and a clear recovery in IP transport (100G ramp-up and new investment cycle in submarine). While the market is still sceptical about the EUR7bn revenue target in core networking for 2015, management remains confident, and there is upside risk in the coming quarters. With a resilient top line in access in 2015 (flattish LFL), group sales could accelerate to +4% LFL (vs. -1% LFL in 2014E).
*Margins well on track to climb to 8% in 2015
The cost-cutting plan is progressing fast (already EUR645m savings at end- Q3), and the company looks well on track to reach EUR950m savings in 2015, while structural actions to improve gross margins are already paying off (in wireless, managed services and IP Platforms) and gross margins are set to continue to climb toward 34% in 2015 (vs. 33.3% in 2014E). All in all, clean operating margin could jump to 5% in 2014 (up 300bp) and 8% in 2015.
* Back to positive FCF in 2015
Management did a great job of improving long-term cash generation through large cost-cutting actions and a significant reduction in financial charges and pension costs. The group looks well on track to see positive FCF in 2015 and could finally generate FCF through the cycle and on a sustained basis, allowing for a material rerating in the coming months.
* Attractive transformation story, significant upside
We keep our Buy rating and update our TP from EUR4.4 to EUR4.3, as the transformation story looks increasingly credible, valuation is undemanding, and upside (+50%) is significant, while the potential sale of the wireless business could create further value (FV close to EUR5).