What Does Nortel's Future Hold?

Today, let’s look into our crystal ball to see what the new Nortel (NT) look like in a few months based on a couple of assumptions:

1. Nortel finds a buyer for its Metro Ethernet Network business.

2. It also dumps the wireless business or spins it off into a JV.

So, if you take MEN and wireless out of the equation, you’re looking at a company focused on the enterprise, carriers (primarily VoIP), and services.

In the process, sales shrink from about $10.5-billion to about $4.8-billion (MEN’s sales are $1.9-billion; wireless, including services, are $3.6-billion).

If the restructuring includes extensive job-cutting, Nortel becomes, in theory, a much smaller, more focused and profitable entity. That’s my take on the approach Mike Z. has embraced.

One more thought on the numbers: If you look at Nortel’s enterprise business, it’s not a very profitable operation that plays in a market where it’s far being a major player. You have to wonder why Nortel is so keen on enterprise given its roots lie with the carriers.

Analyst Response

Paradigm Capital’s Barry Richards is, by far, the most bullish analyst on Nortel. Calling Nortel “profoundly under-valued”, he initiated coverage in June with a $23 target price, and speculated Nortel could hit $50 in the long-term.

So, it should come as no surprise that Richards is one of the few analysts to come to Nortel’s defense in the wake of the news earlier this week that the company was lowering its financial guidance and looking to sell its Metro Ethernet Network business.

In a research note, Richards said Nortel’s lower financial results are an economic reality being faced by other telecom suppliers such as Ciena, as well as carriers such as Sprint (S).

As for the sale of MEN, he thinks it could be worth $2-billion, compared with the $1-billion that he contends others suggests.

He believes Nortel’s restructuring will probably see 2,500 employees, or 8% of the workforce, eliminated. As well, he’s looking for a wireless partnership on LTE, preferably with Ericsson, Nokia, Huawei or ZTE.

Overall, we disagree with those that view yesterday’s news as a surprisingly negative event or as any indication of a company going to zero. The company continues to compete aggressively in the market place and is winning more than $10b in annual business. We understand why so many other analysts have thrown in the towel but we continue to rate the stock a Buy with a target price of $15.00 based on 7.5x EV/FY09 EBITDA.

Comments

[stanleyothe...:]

By are you nuts $15.00 a share for a company that cannot seem to get itself out of the bag. A better bet is that NT get absorbed by another player, if they were lucky. Otherwise they will simply go under.

2008 Sep 22 11:18 AM

[joremero:]

Mark,
I don't understand why you, and most of the press, are saying that NT will sell or spin off wireless when that's where it gets most of the profit. True, CDMA business is declining, but it still makes up most of the bulk revenue.
I've read the press release and heard the press conference, and Mike Z said something like "de-risking" investment, not selling or spinning off. Yes, de-risking is too broad, and yes, he gave examples of the UMTS divestiture and Wimax partnership, but he didn't imply a sale of the business.
NT does want to do LTE, but they know it's going to take years before they see revenue.
Partnerships could be they key to that reduction of risk and that in no way means selling the business.

2008 Sep 22 03:35 PM