TD Securities analyst Chris Umiastowski, who covers Nortel as well as anyone these days, just published an extensive report looking at six of the company’s key R&D opportunities. He believes Nortel’s most important R&D programs are PBT, Wi-Max and enterprise data.
“In our view, carrier ethernet, Wi-Max and enterprise data have the most appealing gross profit potential, and we expect that they could have a more immediate impact on the company’s financial results,” he wrote. “However, it is our view that these R&D opportunities are three to five years out, and that the more near-term opportunity or Nortel to improve its stock price is to deliver on its business transformation cost improvement targets.”
In other words, Nortel needs to continue to hammer home on its Six Sigma program until its R&D activities can bear fruit. The question is whether Nortel can move fast enough and execute well enough to reach its goal of reducing annual operating costs by $1.5-billion. Meanwhile, Nortel CEO Mike Zafirovski has clearly indicated he’s not prepared to wait for operations to improve as evident by the decision to promote Joel Hackney to head of the the enterprise business.
In an ideal world, Nortel thrives with a one-two punch of lower costs and higher sales.
Umiastoski has maintained his buy recommendation and a $28 target price.