French-US company Alcatel-Lucent's core networking unit (routers, optical networking gear, telecom software) "could be worth more than the total value of the entire company" if it was a standalone business, thinks J P Morgan's Sandeep Deshpande, who has upgraded shares to Overweight.
Deshpande notes that Alcatel forecasts core networking (revenue +6.9% Y/Y in Q1 to €1.35bn) will see over €7bn in 2015 revenue with an operating margin of more than12.5%. He adds the routing business (revenue +16.4% in Q1) is Alcatel's "most significantly profitable segment."
The unit has benefited from edge router market growth - Alcatel is the market's number two vendor, behind Cisco - as well as rising mobile data traffic and a successful entry into a core router market long dominated by Cisco/Juniper. Alcatel's cost-cutting efforts are also praised - 2013 fixed cost reductions of €335m beat a €250m-€300m target, and operating costs fell 12% Y/Y in Q1. At the same time, he admits the company's low-margin wireless access business (revenue +2.3% in Q1 to €999m) remains a "problem child," with Alcatel struggling to land 4G infrastructure deals outside of the US and China. He thinks the unit could fetch €2bn or more in a sale.