RBC Still Sees Nortel Struggling To Face Cisco

Includes: CSCO, NT
by: FP Trading Desk

With Nortel Networks (NT) set to report third quarter results on Tuesday, RBC Capital analyst Mark Sue told clients that the company still has a long way to go in order to regain its position alongside Cisco Systems (NASDAQ:CSCO) as a global leader in networking solutions.

"Nortel's end market and competitive advantage for the most part remain challenged and although the shares are off almost 50% from its yearly high and valuation remains compelling at just 0.8x our calendar year 2008 revenues, we're maintaining our neutral rating," Mr. Sue said in a research note.

The analyst said the company's enterprise demand remains healthy, particularly in regard to U.S. financial and manufacturing verticals, but added products are showing signs of age and need to be reinvigorated. Otherwise, strides the company has made in customer satisfaction may be for naught as it contends with the formidable task of competing with Cisco Systems.

Mr. Sue expects Nortel's revenues to hit US$2.7-billion for the third quarter, representing a decrease of 8% year-over-year, but noted its gross margins should hold flat at 41% due to volumes and mix, while earnings per share should be closer to 8¢.

As for the company's fourth quarter, he said Nortel's revenue will probably only hit US$3.2-billion despite expectations that Nortel will provide fourth quarter guidance somewhere in the range of US$3.5 to US$3.7-billion.

"Even if Nortel clears a large sequential hurdle for 4Q, challenges remain," the analyst wrote.

"With GSM [networks] share eroding and 4G [WiMax technology] taking longer than expected to ramp, Nortel may see little top line growth in its wireless segment (approx. 40%) in 2008. Compounding the issue is the ongoing restructuring at key customer Sprint (NYSE:S)."

Mr. Sue maintained his "sector perform" rating and left his US$18 price target unchanged.