CitiGroup Upgrades Nortel

CitiGroup analyst Michael Genovese has jumped on the Nortel bandwagon by upgrading the stock to “buy” from “hold” while setting a target price of $35 from $25.

“There is an attractive restructuring and valuation story,” he wrote in a 23-page report. “Nortel plans to reduce about $1.5 billion in costs by the end of 2008. We expect EPS to turn positive in 2007 and grow about 140% in 2008 to $1.75, and with consensus at $1.52, we do not think the Street is giving Nortel the proper credit for the restructure. Nortel has a strong new management team in place and is increasingly focused on a few areas of potential growth including carrier VoIP/IMS, Optical, Ethernet, EV-DO, WiMax, and Enterprise voice and data.”
Genovese raised his 2007 earnings estimate to 72 cents a share from 35 cents, compared with the consensus estimate of 65 cents. “We believe Nortel’s restructuring is underappreciated by the Street and consensus estimates are too low,” he said. “As [gross margins] and earnings improve, we expect the valuation to move towards our target of 20 times 2008 EPS, or $35 per share. We expect revenue growth rate acceleration and continued margin expansion beyond 2008.”

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