Analyst Update

Here’s some recent activity by financial analysts:

– Robert W. Baird lowered its 2007 revenue estimate to $11.2-billion from $11.5-million, while raising its EPS target to 75 cents from 74 cents. For 2008, Baird is looking for revenue of $11.6-billion and EPS of $2, compared with an earlier estimate of $11.7-billion and $2.11 respectively.  Meanwhile, RBC Capital Markets lowered its 2007 EPS estimate 44 cents from 47 cents on flat guidance; CIBC World Markets lowered its 2007 estimate to EPS of 72 cents on revenue of $11.4-billion from $1 on $12.4-billion; and Prudential Equity Group lowered its 2007 estimates to 17 cents from 45 cents and its 2008 estimates to $1.23 from $1.54.

Merrill Lowers Revenue, EPS Targets

After meeting with CEO Mike Zafirovski recently, Merrill Lynch analyst Vivek Arya decided to lower his 2007 revenue estimate to $11.48-billion from $11.78-billion amid concerns the company will see a 12% to 15% decline in wireless sales, which accounted for 44% of overall sales in 2006. Arya also reduced his 2007 EPS target to 68 cents from 74 cents (compared with the average estimate of 75 cents), and his 2008 EPS forecast has been dropped to $1.48 from $1.55.

Nortel to Demo IP-TV Portfolio

You know the IP-TV business is getting serious when there’s an IPTV World Forum happening in London. Of course, Nortel will be there demonstrating “how real-time multimedia and entertainment services can be converged onto the TV to improve the user experience by providing greater control over the home communications environment.” Nortel will also unveil a new partner for developing new TV services.

On the IP-TV front, the biggest news recently was Ericsson’s intention to buy Tandberg TV for $1.4-billion – a 10% premium to Arris’s offier. In a recent report, UBS Securities said Ericsson’s flurry of IPTV deals recently illustrate how serious it has become about the business, although the investment firm suggests integrating these purchases may be a challenge. Of the other big telecom suppliers, UBS said Alcatel/Lucent may have to respond to Ericsson’s move by acquiring encoding/video-on-demand technology, while Cisco is well-positioned. UBS said Motorola lacks edge routers, metro and access technology, Nokia-Siemens’ portfolio does not include encoding/VOD and edging routing, while “NT’s competitive position in IPTV remains weak”.

“While Nortel’s public stance is to compete in the IPTV market, its competitive position is very weak in our view as it only has the Metro transport part of the solution,” UBS said. “While the company could pursue acquisitions to quickly enter the IPTV market, there would be many product holes to be filled in, including Access, Edge Aggregation/routing, Encoding/VOD, and Middleware, making any entry in to the IPTV market tough and likely irrational in our view. We believe Nortel shareholders would not view acquisitions in the IPTV market favorably.”

Update: Accenture recently released a study on IP-TV. Not surprisingly, more than half of communications industry executives believe IP-TV can generate significant revenue within the first three years of service.

Nortel Shares on the Rise

With little fanfare, Nortel shares have started to gain some momentum over the past month. The stock closed yesterday at $31.62, a 16% climb in the past month. It’s not like analysts have been falling over themselves pushing the stock, although people such as RBC’s Mark Sue are getting a bit more positive.

RBC Raises Target Price

According to Seeking Alpha, RBC Capital analyst Mark Sue has increased his price target to $32 from $28 based on his belief Nortel is “slowly starting to turn the corner,” and that the company “has worked steadily to increase its relevance with major customers.” Sue rates Nortel as a “sector perform”.

Q4 Looks Good

While cutting 2,900 jobs is far from positive news, Nortel also announced preliminary fourth-quarter results that surpassed the expectations of UBS Securities. Nortel said revenue will be $3.26-billion while gross margins will be about 40% – ahead of the $3.1-billion and 38.5% expected by UBS. In a research note, UBS analyst Robert Dennison said strength in CDMA and LG-Nortel joint venture likely accounted for the higher than expected sales in Q4. He said Nortel’s CDMA high-margin CDMA business likely helped gross margins.

Dennison is raising his 2007/2008E EPS estimates to $1.00/$1.86 from $0.66/$1.50 while increasing his stock target price to $28 from $26. “We expect near-term momentum in NT’s stock on the back of CDMA strength and ongoing cost reductions,” he said. “We remain concerned though on the outlook for 2008 when we expect high-margin CDMA revenues to decline substantially. We estimate CDMA contributed 80-90% of overall company EBT in 06.”

Update: The flurry of news over the past 24 hours (CFO Peter Currie’s resignation, the layoffs, the preliminary Q4 rsults) helped All Nortel, All the Time generate record traffic today (2,700 pageviews).

S&P Downgrades NT

S&P analyst Ari Bensinger has downgraded Nortel to a “sell” from to a “hold” amid concerns about “heightened competition and carrier consolidation hampering marketing growth opportunities”. Bensinger expects Nortel’s sales grow by just 3% in 2007. Commenting on the departure of CFO Peter Currie, Bensinger said the company needs to “better stabilize its management group, especialy as it is looking to improve profitability through cost-cutting and non-core asset disposals”.

What Nortel Must Do to Complete Comeback

Network World’s Jim Duffy, how covers the telecom beat as well as anyone, has an interesting story for anyone curious about Nortel’s comeback efforts. In an article called “Five things Nortel must do to complete comeback”, Duffy writes that Nortel’s customers, partners and analysts believe the company needs to:

– improve business relations with users and resellers
– rationalize its product line, which still appears to be “confusing and redundant”
– rationalize its lines of business to really become a rival to Cisco in the enterprise sector
– purchase or develop its way back into the IP core and edge router market
– work out a way to get bigger so it can compete with rivals such as Alcatel-Lucent

Nortel’s chief strategy officer George Riedl’s top five priorities are:
– Reduce costs or expand margin by $1.5 billion over the next several years;
– Transform the enterprise business;
– Drive next generation mobility around 4G wireless technologies;
– Build a professional services business;
– Retool the company’s brand awareness and go-to-market strategy

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TD’s Thoughts on the BT Deal

TD Securities analyst Chris Umiastowski has some thoughts on Nortel’s recent Ethernet supply deal with BT, which he believes is worth well under $100-million.

“n our view, this win with BT is more psychologically important than financially material. Nortel has driven the development of this new flavour of Ethernet, and is clearly now seeing success with a major Tier 1 carrier. This is encouraging, however the deal size is likely not material to Nortel. We believe the contract is valued well under $100 million (less than
the equivalent of 3 days of revenue). This technology could well create meaningful value for Nortel’s shareholders over time, and we show how it could add $4 to the company’s stock price. For this to happen the technology would have to gain widespread adoption and Nortel would have to gain significant market share. Nortel has done it before with DMS switching, OC- 192 optical technology, CDMA wireless technology and Passport in the ATM switching market. It could happen again.”

Umiastowski rates Nortel as a “hold” with a target price of $25.

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UBS Maintains Neutral Rating

In the wake of Nortel’s Ethernet deal with BT earlier this week, UBS has maintained its “neutral” rating on Nortel with a target price of $26. The investment firm said the agreement to supply equipment to BT’s next-generation network will boost the value of Nortel’s provider backbone technology, while the stock is expected to appreciate.

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Bernstein Downgrades NT

In the better than late than never news category, Sanford Bernstein analyst Paul Sagawa downgraded Nortel last week to “underperform” from “market perform”. Sagawa expects a “sharp deceleration” in telecom equipment spending.

UBS Raises 2007 Estimates, Target Price

Citing Nortel’s prospects in the CDMA business this year, UBS Securities has raised its EPS and revenue targets to $12.12-billion and $0.66 respectively from $11.96-billion and $0.56. UBS also raised its stock target price to $26 from $23.50.
In 2008, UBS is looking for revenue and EPS targets to $12.4-billion and $1.50 compared with earlier estimates of $12.54-billion and $1.60 as it expects CDMA sales to decline by 6% to reflect the completion of Rev A rollouts (as opposed to earlier estimates of a 5% increase).
In terms of Nortel’s failure to be selected as one of Sprint’s three WiMax suppliers, UBS said this “is a disappointment given NT’s incumbency and focus to win the deal. We believe this loss may cause NT to reevaluate its overall wireless strategy and possibly deemphasize wireless longer term.”
On a positive note, UBS expects Nortel will focus on boosting its enterprise business in 2007 so it can become a “meaningful #2 to CSCO. We continue to believe NT would have to look at acquisitions to strengthen its enterprise portfolio, particularly in enterprise data”.
Update: TheStreet.com covered the news as well.

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My Top Pick is….Nortel. Say What?

It’s not often you come across a fund manager who has Nortel has his/her top pick but Robert Callander, a portfolo manager with Caldwell Securities Ltd., appears to be the exception to the rule. Mr. Callander, who ranks Nortel as a “buy”, told the Globe & Mail he was encouraged by the company’s recent stock consolidation, which he sees as the final sign of a recovery. Callander’s also excited by Nortel’s cost-cutting program and the recent $2-billion contract with Verizon Wireless. “When you start to get wins with the biggest in the industry, other people stand up and take notice,” he said.

Analysts Pragmatic About Verizon Contract

It’s interesting to see the pragmatic – if somewhat unenthusiastic reaction – among analyst to Nortel’s $2-billion deal with Verizon Wireless, which was announced yesterday. It’s almost like no one is willing to jump back on the bandwagon even though Nortel appears to have gained some momentum with a key customer. A good example is Sanford C. Bernstein analyst Paul Sagawa, who told the Globe & Mail that Nortel will be getting about $400-million of business year from Verizon, which is close to what it’s already been selling to the largest wireless carrier in the U.S. “Nortel’s got some 20-per-cent share of the Verizon network, and they’re going to [continue to] get that unless they do something really egregious to lose it,” he said. “Basically it’s an expansion and upgrade to an installed base that’s already there.” Nortel shares climbed 3.1%, or 75 cents, yesterday to $24.50 in New York.

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RBC Reduce Target Price

RBC Capital Markets has dropped its 12-month target price on Nortel to $24 from $25 while maintaining its “sector perform” rating.

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