Alcatel-Lucent SA's sixth consecutive quarterly loss persuaded Janardan Menon to abandon his hold recommendation on the shares. The Dresdner Kleinwort analyst told clients to buy.

Shareholders have about 40 cents left for every dollar invested in the 2006 merger creating the world's largest supplier of fixed-line telephone networks. The July 29 results brought losses at Paris-based Alcatel-Lucent to more than $7 billion and Chief Executive Officer Patricia Russo and Chairman Serge Tchuruk said they'll resign.

``There's no sense in being negative on the stock at these levels,'' said the London-based Menon, 41, citing signs that cost cuts lifted operating margins in the second quarter.

Menon joined Kulbinder Garcha at Credit Suisse recommending Alcatel-Lucent, pointing to lower expenses, a post-Olympics pickup in orders from China and a promise of new management by year-end. The changes may propel the shares 82 percent to 7.50 euros ($11.04) in 12 months, according to Garcha, the top telecommunications-equipment analyst in Institutional Investor magazine's annual survey in February.

Alcatel-Lucent rose 0.3 cents to 4.12 euros yesterday in Paris trading and has increased 5.4 percent since Menon said to buy. After the Paris-based weekly newspaper Le Canard Enchaine reported former science, technology and strategy president Mike Quigley was a probable replacement for Russo, 56, the shares rose 4.7 percent on Aug. 26. Former French Finance Minister Thierry Breton is also a candidate for CEO, the paper said.

`Well Regarded'

Stephane Lapeyrade, a spokesman for Alcatel-Lucent, declined to comment on the report. Quigley, 55, and Breton, 53, couldn't be reached for comment.

Quigley, who left the company a year ago, ``was very-well regarded and had a very good reputation'' for forging relationships with customers, said Pali International Ltd. analyst Peter Knox. His selection would ``be taken as positive news.''

At 0.56 times this year's estimated sales, Alcatel is less than half as expensive as Swedish competitor Ericsson AB, according to data compiled by Bloomberg. Dodge & Cox in San Francisco bought 30.3 million of the French company's shares in the quarter ended June 30, regulatory filings show. Baltimore- based T. Rowe Price Group purchased about 13 million shares.

``If I talk to other investors, it's toxic. They don't even want to talk about it,'' said T. Rowe Price analyst David Eiswert. ``That's good. This could be a fantastic stock from this valuation level.''

Dodge & Cox spokesman Steve Gorski said the company doesn't comment on investments.

`Keep My Distance'

Eight analysts tracked by Bloomberg have advised selling Alcatel-Lucent in the past three months, versus six who suggest buying and nine saying hold.

``It's a stock from which I keep my distance,'' said Arnaud Scarpaci, who manages 150 million euros at Agilis Gestion in Paris. ``One good quarter, that won't suffice. You need to have a whole year of better results.''

Alcatel-Lucent was created by the $14.6 billion merger of the French industrial manufacturer Alcatel SA and Lucent Technologies Inc., the former equipment unit of what was once U.S. telephone monopoly AT&T Corp. It has never earned a profit.

The wireless-network market has shifted away from a standard Alcatel-Lucent has dominated, code division multiple access, or CDMA, toward the global system for mobile communications, or GSM.

30 Percent

CDMA accounts for more than 30 percent of Alcatel's 2.8 billion euros in annual wireless revenue, estimates Stuart Jeffrey, an analyst at Lehman Brothers Holdings Inc. in London, who has an underweight recommendation on the stock. Russo wrote down the business's value by 810 million euros in the second quarter, after a 2.52 billion-euro writedown in February.

Wireless sales may bolster earnings in the fourth quarter and next year, as China Telecom Corp. starts spending 80 billion yuan ($11.7 billion) to upgrade a CDMA network it's buying from China Unicom Ltd.

Alexander Peterc of Exane BNP Paribas, the top European communications-equipment analyst in Thomson Extel's June survey, cited Chinese post-Olympics spending last month in projecting Alcatel-Lucent will reach 6 euros in the next 12 months. The company had market share of about 13 percent in the country last year, Lapeyrade said.

After changing little this year, the global wireless- equipment market will expand by 8 percent to $46 billion in 2009, said analyst Scott Siegler with Dell'Oro Group in Redwood City, California.

Besides the boost from Asia, source of 17 percent of Alcatel's 2007 revenue, expense reductions will take hold to ease pressure on operating margins, Menon said.

Job Cuts

The company eliminated 9,000 jobs as of June 30, part of a planned 16,500 cuts. Cash restructuring costs will taper off in 2009, the company has said.

``They have shown some results on the cost-cutting efforts and we expect that will continue,'' Menon said. ``As long as the margins go in the right direction there is no risk for the share price.''

Adjusted for merger-related items, operating profit was 2.3 percent of sales in the second quarter, compared with 0.9 percent in the first and an operating loss a year earlier.

The margin may expand to as much as 8 percent by 2010 or 2011, said Per Lindberg, an analyst at MF Global Securities in London, who advises investors to buy the shares.

``At current prices it's a good stock to own,'' he said. ``Everything in life has a price.''

Source:Bloomberg