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

Alcatel (ALA)

Jim: Buy

Mike: Buy

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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

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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.

Jim: True, though it wasn’t always so. In the first few years after the spinoff, Borders got off to a fast start. Its management was highly regarded, earnings were growing at a double-digit rate, and it was successfully expanding abroad.

Borders was one of the first book superstores with the sophisticated ambience to draw lots of customers.

Mike: Sure, I remember going to a Borders in the Washington suburbs back in 1992. It was a great store, a great place to buy books. They did have a huge selection.

Jim: Well, what a charming story, Mike. Going into a Borders is still a pleasant experience. But I get the same feeling visiting a Barnes & Noble. And therein lies one of Borders’ problems: I see Borders and Barnes & Noble as interchangeable, and that goes for their Web sites as well.

Mike: No, their performance on the Internet is not interchangeable.

Jim: You think not? Is there really a difference buying books online from Borders, Barnes & Noble or Amazon.com, which started the whole book-selling wave on the Web?

Mike: A huge difference. I suspect readers who have tried all three would agree that the Borders Web site is not as effective as the other two. In fact, one problem with Borders is that it was very, very late getting on the Web.

Jim: It took the cautious approach.

Mike: Management said it was waiting until it had a Web site that really sings, because that’s what the customer wants. Guess what? Borders woke up three years later and realized there was Amazon.com and there was Barnesandnoble.com. In my opinion, Borders’ site still brings up the rear.

Jim: On the positive side, Borders’ superstores themselves are quite profitable.

Mike: At one time this was the most profitable bookseller in the country.

Jim: Right. But Borders’ main problems are Waldenbooks and the Web site, which are losing money. I almost wonder if Borders wouldn’t be better off dumping the Waldenbooks chain.

Mike: Bad idea. Borders is taking a close look at Waldenbooks with a mind to close the chain’s underperforming stores, which is smart. But the rest can still turn a profit. And don’t forget: I see a Waldenbooks in virtually every mall I walk into. I can’t say I’ve ever seen one empty, and some are downright crowded.

Believe me, when you’re somewhere like Cocoa Beach, Fla., Waldenbooks is a book buyer’s oasis.

Jim: Who wants to read when they’re in Cocoa Beach?

Mike: Anyway, let me crack open the binding and take a firm stand: I don’t dislike this stock.

Jim: Boy, some recommendation. What are you doing, bucking for a job on CNBC?

Mike: Look, I can’t turn cartwheels over it. But I think that at the current price of roughly $13.50, you’re not going to lose money with Borders. I see a slow, steady climb in the stock, and right now it’s well-priced, with a price-to-earnings multiple of just 10 based on estimated 2000 results. What’s wrong with that?

Jim: Nothing, but it has a P/E of 10 because that’s all investors think this stock is worth! And I agree with them.

Mike: You’re underestimating the prospects of this company.

Jim: What prospects? Maybe there isn’t much more downside to Borders, but I don’t see much upside, either. This is dead money, just as it has been dead money for the last year: It has mostly traded between $13 and $17 in that time.

Mike: You’re right about that. I’m looking at my chart here and Borders for the last 12 months has gained a minuscule 1%. But I think that will change as Borders’ earnings pick up.

Jim: I’ll give you one thing: Over the last five years, Borders has outperformed Barnes & Noble’s stock by plenty. But I’m sorry, I just don’t see Borders’ growth accelerating, especially with Waldenbooks going nowhere and the Borders Web site an also-ran in a very crowded field. And I think the stock’s lousy performance reflects that.

Mike: Jim, unless you are a sedulous believer in the principle that stocks always accurately reflect a company’s potential--

Jim: “Sedulous?”

Mike: It means “diligent.”

Jim: Thank you.

Mike: --then how do you ever make money in stocks? The fact that the stock hasn’t moved while the company’s fortunes have started improving actually says there is an opportunity here.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).