Nortel News: RBC Slashes Price Target, Zacks Maintains Hold, Beatty, Gollogly Face Criminal Charges, Downside to Nortel-Motorola Venture

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Includes: GOOG, NT
by: Mark Evans

RBC Slashes Price Target

RBC analyst Mark Sue took a baby step last month by cutting his target price for Nortel (NT) to $16 from $18.

Now, he’s taking a major step by slashing his target price to $10 ($1 taking into account the 1:10 stock consolidation) from $16, while maintaining his “sector perform” rating.

Sue said the decision was based on the fact demand outlook traditional telecom equipment is deteriorating, Nortel’s competitive positioning has worsened, and its balance sheet is weak. “In our view, the demand outlook is weakening for traditional telecom equipment,” Mr. Sue said in a recent research note to clients. “And considering Nortel’s compromised competitive positioning and its challenged balanced sheet, we believe that there may be more downside risk to the shares.”

He expects Nortel quarter-over-quarter revenue in the first-quarter to decline by 25% to $2.4-billion.

For more, check out the National Post’s Trading Desk.

Zacks Maintains Hold

Zacks Investment Research has maintained its “hold” rating on Nortel but has reduced its target price to $15 based on the belief that telecom equipment makers will be affected by tighter capital spending budgets amid expectations of a recession in the U.S.

Zacks said Nortel is currently trading at a fiscal 2008 price-earnings ratio of 35.1, which is a premium to the forward S&P 500 average and the telecom equipment group.

In the near-term, we believe the stock price will remain volatile,” Zacks said in a research report. “The possibility of an economic recession in the U.S. may add some short-term fluctuations. Therefore, we maintain our Hold rating with a reduced valuation target of $15, which is based on a price/sales ratio of 0.65x our fiscal 2008 sales estimates.

A silver lining for Nortel watchers and investors is that Zacks said “Nortel has a strong market position supported by the companys gradual introduction of innovative customized products specifically designed for IP-based converged networks and enterprise solutions”, while adding that “Effective product cost management and ongoing restructuring activities have improved the company's gross margin.”

Beatty, Gollogly Face Criminal Charges

Nearly four years after two Nortel senior executives were fired for cause, the Royal Canadian Mounted Police [RCMP] is poised to charge Doug Beatty and Michael Gollogly with criminal fraud amid allegations they cooked the company’s books to trigger a lucrative bonus plan.

Citing sources, the National Post is reporting that the RCMP notified Beatty, Nortel’s ex-CFO, and Gollogly, its ex-controller, of “imminent” criminal charges being filed against them. The investigation leading to the charges is apparently focused on the financial results from the fourth-quarter of 2002 to the first two quarters of 2003.

More: The National Post also has a timeline of Nortel’s accounting scandal.

Downside to Nortel-Motorola Venture

Earl Lum doesn’t think much of the speculated Nortel-Motorola (MOT) wireless joint venture.

Lum, the president of research firm EJL Wireless Research, believes a NT-MOT marriage would have more disadvantages than advantages. According to a story on TMCNet, EJL’s analysis showed “lagging market share for both Motorola and Nortel in the 2G market and virtually no market share for 3G”.

The reports suggests that while Nortel and Motorola have focused heavily on WiMax, EJL isn’t convinced it will have a happy ending for either company because LTE may be a better technology.

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