Credit Suisse Warns Against Bottom-Fishing at Nortel

| About: Nortel Networks (NT)
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Nortel (NT) shares sold off Thursday in sympathy with the Alcatel-Lucent (ALU) earnings warning. The stock rebounded a bit Friday, but Credit Suisse’s Paul Silverstein advises against trying to bottom-fish the stock.

“Nortel remains too large and continues to suffer from too much legacy product market exposure to avoid the prevailing challenging carrier capital expenditure growth and pricing environment,” he wrote in a research note Friday. He sees “significant risk” in downward revisions to the company’s revenue outlook, and spillover into gross margins, undercutting the company’s restructuring story.

Silverstein says industry checks suggest Nortel’s third and fourth quarter revenues are trending below current company guidance, due to weak CDMA wireless revenue, an area which he says accounts for about 20% of the company’s total revenue.

Given the significant overlap between Nortel’s and Alcatel-Lucent’s CDMA customers - with Nortel being a strong number two to Alcatel-Lucent at Verizon (NYSE:VZ) and Sprint-Nextel (NYSE:S), which historically have been both Nortel’s and Alcatel-Lucent’s two largest CDMA customers - we believe that Alcatel-Lucent’s commentary regarding lower capital expenditure forecasts strongly suggests that…our Nortel revenue and gross margin forecasts will prove high.

Silverstein trimmed his 2008 EPS estimate to 94 cents from 97 cents; he keeps his 2007 estimate at 37 cents.

Silverstein cut his price target on the stock to $16 from $17.

NT 1-yr chart: