3 high-risk telecom turnarounds

These stocks are speculative bets on a sector upturn.

By TheStockAdvisors Oct 18, 2012 9:54AM
Maciej Frolow Brand X Getty ImagesBy George Putnam, The Turnaround Letter

Few industry groups have done as poorly over the past decade as the telecom equipment companies. So why would anyone want to buy telecom equipment makers now?

They do have a few good things going for them. And the three companies below -- Alcatel-Lucent (ALU), LM Ericsson (ERIC) and Nokia (NOK) -- could benefit significantly if there is an upturn in the equipment sector.

First of all, potential demand. The volume of wireless data continues to grow at a rapid rate. The number of 4G networks around the world is expected to triple this year compared to last year. And competitive pressures will likely lead to 5G and 6G networks before long.

Secondly, the rate of consolidation among service providers could begin to slow. With global behemoths dominating the service landscape, there may be opportunities for nimble new entrants.

Finally, while the Chinese competition is not going away, it is becoming more mature and may be losing some of its cost advantage.

The companies below are not without risk, but they have very substantial appreciation potential if they can get back on track.

Alcatel-Lucent, formed via the 2006 merger between France-based Alcatel and U.S.-based Lucent, was once considered the dominant player in the sector. But difficulties in integrating the two legacy entities and other management missteps have held the company back.

Nonetheless, Alcatel-Lucent still has strong relationships with many global customers, as well as a vast store of intellectual property. If management can finally get things right, the stock could go up several-fold.

LM Ericcson has been around for well over a century. Today, it stands as the world's largest supplier of equipment and services to wireless networks.

While currently not firing on all cylinders -- its two joint ventures are struggling, and it is divesting an asset purchased just a few years ago -- the company is well positioned for growth. The balance sheet is solid, and the stock is attractively valued.

Nokia dominated the cell phone handset market for well over a decade. But the company's recent products have been squeezed between high-end smartphones and low-cost production from China.

Management, led by a new CEO in 2010, has been cutting costs, streamlining operations and partnering with Microsoft (MSFT). The company's latest Windows-8 operating system smartphones -- Lumia 820/920 -- were just released in early September to good reviews. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

While Windows 8 systems still have a small market share, Nokia's alliance with Microsoft could fuel future growth.

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