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Wall Street, California | STOCK EXCHANGE

Say Oui to Telecom Firm Alcatel; for Borders Group, Read the Fine Print

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.

October 03, 2000|JAMES PELTZ and MICHAEL HILTZIK

Alcatel (ALA)

Jim: Buy

Mike: Buy

*

Mike: Alcatel is the second-largest French company in terms of market capitalization, Jim, and here's this week's puzzler: Can you identify any other French enterprise of such size?

Jim: Uh . . .

Mike: I thought not.

Jim: Actually, this is the first French stock we've done, no?

Mike: Well, most Americans probably don't think of the French as global industrial leaders.

Jim: Let's just say it's a good thing Alcatel doesn't make cars. If it did, I wouldn't even bother with this chat.

Mike: You know the old saying: The French follow nobody, and nobody follows the French. In fact, Alcatel illustrates how all that is changing. French companies are becoming much more successful worldwide in a range of industries, and Alcatel is now a star in the telecommunications field.

Jim: No question. Now, some of our readers asked us to look at Alcatel, reflecting the growing U.S. interest in this outfit. One century old, Alcatel is a maker of telecom equipment, components and wireless phones.

Mike: Typically for a French company, it was nationalized by the government in 1982. Five years later, it was spewed out as a public entity.

Jim: For years this company was a stodgy, also-ran to the likes of Lucent Technologies, Nortel Networks and other makers of telecom gear. Then Alcatel got rid of its non-telecom units to streamline its operations. It also aggressively expanded into the U.S. market, and it's paying lots of attention to its investors, which is very evident in the stock price.

Mike: Alcatel has even taken away contracts from some creditable American companies, including a big contract that it won over Cisco Systems--

Jim: A feather in anyone's beret.

Mike: --to provide DSL technology for SBC Communications, the parent of Pacific Bell. This is technology that allows you to get high-speed Internet service over your phone lines without interfering with your phone service.

Jim: DSL stands for digital subscriber line, doesn't it?

Mike: Yes. Alcatel's DSL technology is good and it's generating strong profit.

Jim: Alcatel also recently bought Newbridge Networks, a Canadian maker of networking gear that makes Alcatel more of a force in the Internet sector.

Put it all together, and Alcatel's annual sales are about $25 billion.

Mike: Now, looking at the stock I have to say its valuation, though high, is not prohibitive. I'd buy the shares.

Jim: Really? That's exactly my take on this stock.

Mike: Wow, for a second there I thought you were going to put up your dukes.

Jim: When you first look at Alcatel, you see a stock that has soared 40% so far this year, and it has more than doubled over the last 12 months. So it carries a lofty price-to-earnings multiple of about 47 based on 2000 estimated earnings per share.

Mike: That's lofty?

Jim: Yes, Mr. Facetious, it is, relative to the general stock market. But you need to put Alcatel in context with its peers. Cisco's P/E is 75 based on 2000 estimates, Nortel's is 83 and so forth. So you could say Alcatel is undervalued. Or to put it in plain English, the price makes for an attractive entry point.

Mike: I see your definition of plain English isn't the same as mine. Anyway, a few years ago this company stumbled somewhat. In 1998 BusinessWeek ran a piece entitled "Maybe Alcatel Isn't the Lucent of Europe," implying that Alcatel was lagging Lucent's success.

How ironic. Because now the punch line is that Alcatel indeed isn't the Lucent of Europe, and aren't we happy for Alcatel! I know, because as a Lucent shareholder I wish I owned Alcatel instead.

Jim: Point is, Alcatel's sales are rising at a double-digit pace, and its operating profit margin--which measures earnings from its basic business before it pays taxes and interest--is expanding nicely: The company earned about seven cents on each dollar of revenue in 1996, while next year it might reach 14 cents.

Mike: And that's a good sign. In this business, you can really be in the catbird seat if you get your margins improving. That's because, while telecom products' prices inevitably fall, the products also get cheaper to manufacture--if you know what you're doing. That leads to the gravy train of widening profit, and it's one more reason why I like Alcatel.

Borders Group (BGP)

Jim: Don't buy

Mike: Buy

*

Jim: Another reader requested that we take a look at Borders Group, Michael, noting that the bookstore chain has a cheap stock and that its stores have a great selection of titles. They also sell coffee. Imagine that!

Mike: Hang on. Are we talking about Borders or Barnes & Noble?

Jim: You can't tell the difference?

Mike: No, and that's the point.

Jim: It sure is. So what else is new about a bookstore chain that has a wide selection and a coffee bar?

Mike: Exactly. Now, let's start with a little history. Borders used to be owned by Kmart, which spun off the chain in the mid-'90s. Borders also owns the mall-based Waldenbooks chain. But lately Waldenbooks has been a drag on Borders' results.

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