Turnarounds That Haven't Turned Around: Nortel (NT, CSCO, ALU)

Nortel Networks Corp. (NYSE:NT) is one of the old tech/telecom equipment stocks that has never seemed to be able to make a turnaround hold.  The company is far from alone and competition from behemoths is fierce in an environment where wire-line and wireless telecom and communications equipment providers have seemed to merge into larger companies that are smaller in numbers.   

At $15.55, Nortel is at the bottom of its $15.32 to $31.79 52-week trading range and it has hit our own list of 52-week lows recently more times than we'd care to rehash.  But on a reverse-split adjusted basis this reached more than three-times that price in early 2004.  It's been downhill ever since.  In late-2006 Nortel tried the 1-for-10 reverse stock split to get off the $1 to $3 stock handles and to lower its share count.

The truth is that Nortel always seems to still get decent-sized orders here and there and it had revenue growth in each of the last three years.  But that isn't expected for 2007 and not that much in 2008. The good news is that its EPS measurement is expected to improve significantly in 2008, but based on the 2007 stock activity you wonder if that is being second guessed.  Even if it can rally 25% to the $21+ average analyst target it won't at all be considered a successful turnaround.  It also has very spotty earnings that skew annual results.

It still has a $6 Billion market cap, has somewhere around 33,000 employees (down from over 90,000 workers in the tech bubble), and it still has major strategic partnerships on every continent.  It offers close to a full service product and services portfolio.  It also has a fairly young management team for a telecom and networking equipment giant.  But it has one crummy stock. Recent layoffs are not really able to be enough to make a dent and you wonder just how many plant consolidations can realistically occur.  Its balance sheet doesn't look truly inverted, but the way we analyze liquidity it is far from pretty and far from being in a safe breathing room.

Maybe the strength in the Canadian dollar is partly to blame, even if companies are supposed to be able to hedge this at least some.  Nortel Networks is in perhaps the same boat as Alcatel-Lucent (NYSE:ALU), but even a makeover hasn't seemed to help it.  We still would rather see Russo canned from Alcatel-Lucent as the token American more than we'd like to see another change at Nortel.  Cisco Systems (NASDAQ:CSCO) is just too big and too powerful in this space.  With Cisco's business ultimately all coming back in dollars in theory, the tech and networking beast may have even that much more of an advantage when bidding on international enterprise business.

This one isn't over yet and management still has more changes to impose, but it's still hard to get overly excited about the great turnaround at Nortel.  We aren't going to formally declare the new name "No-Tel" yet, but..........

Jon C. Ogg
December 20, 2007

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