Nortel May Meet Quarterly Goals, But Will Struggle Nonetheless

| About: Nortel Networks (NT)
This article is now exclusive for PRO subscribers.

A generally slow pace of improvement and continued market share weakness in several of its key segments have put shares of Nortel Networks Corp. (NT) at both a yearly and four-year low – and they look like a long-term play for any interested investors.

To put that in perspective, Research In Motion Ltd.’s (RIMM) market cap is now seven times as large as Nortel’s, RBC Capital Markets analyst Mark Sue pointed out in a note to clients.

And he isn’t expecting a turnaround anytime soon, so he cut his price target on Nortel to US$22 from US$28 with a “sector perform” rating.

But it's not all bad news. Despite concerns raised by Alcatel-Lucent (ALA), Mr. Sue doesn’t think CDMA spending in North America will fall all that much. Nortel’s enterprise business and the Asian market are showing signs of firm order trends, which could mean the company meets RBC’s third quarter revenue number for US$2.7-billion.

However, even if Nortel achieves its top-line targets for the third and fourth quarters, it still faces competition, a bloated cost structure and a weak balance sheet, Mr. Sue said. The stock may stabilize when the company’s revenue trends firm up and costs are cut, he added.

NT 1-yr chart: