Nortel Sentiment Improving: What's Next For Shares?

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Includes: ALVR, CSCO, NT, VZ
by: Larry MacDonald

Sentiment has recently improved among analysts covering Nortel Networks (NT). Over 30% now recommend buying the company’s shares, compared to 20% three months ago. Also, bond-rating agency DBRS today changed its B (low) rating on Nortel debt from a stable to a positive trend. Nevertheless, the June rally in Nortel shares has evaporated with the 35% decline in recent weeks.

Perhaps the sell-off is related to recession fears. But telecom spending has been picking up due to a surge in bandwidth-intensive video transmission, and is forecast to grow strongly. Cisco Systems (NASDAQ:CSCO) for example, projects 50% annual Internet traffic growth. If the recession is not too severe, perhaps telecom spending can still continue to rise.

Nortel is showing some promise in the 40-gigabit optical transport line, with over a dozen contract wins during two months of general availability in its new line-up. And JPMorgan analyst Ehud Gelblum upgraded Nortel stock in early June to a buy (following a four-year neutral rating) thanks in part to a key contract win with Verizon Communications (NYSE:VZ) for Metro Ethernet switching equipment.

Analysts have said Nortel is making progress on cutting costs and jettisoning disappointing businesses (a la the General Electric culture from which CEO Mike Zafirovski hails). Still, the wireless division, which is carrying the other business lines, faces a projected 4% annual decline in the CDMA wireless market.

Nortel is preparing for the wireless future by putting its WiMax initiative into a partnership with Alvarion (NASDAQ:ALVR) and concentrating R&D on the LTE (long-term evolution) standard -- which analysts have applauded because some of the largest phone companies are leaning toward LTE. Nortel also says it is the only company in the industry conducting live trials of LTE; however, it also faces more competition in this new arena.

So where is the stock going? Despite recent price action, there seems to be an improvement in expert opinion and fundamentals. Still, the situation remains speculative. And add a grain of salt to my update – I’m a long-suffering Nortel investor whose holdings are down 70%.