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Nortel Networks $2.60 – Toronto symbol NT

NORTEL NETWORKS CORP. $2.60 (Toronto symbol NT; Aggressive Growth Portfolio, Manufacturing & Industry section; SI Rating: Speculative) is one of the world’s leading suppliers of telephone and computer network equipment to large telephone service providers and corporations.

Nortel has completed its recent accounting review, and is now up to date with its earning filings. In the second quarter of 2006, it earned $0.08 a share (total $366 million), compared with a loss of $0.01 a share ($33 million) a year earlier. (All amounts except share price in U.S. dollars.)

However, the latest results included a partial reversal of an earlier charge to settle a shareholder class-action lawsuit. That increased income in the latest quarter by $510 million, and offset $45 million in restructuring costs and a $10 million loss on the sale of assets. The loss in the year-earlier quarter included $92 million in restructuring costs and an $11 million loss on asset sales. Revenue in the quarter grew 4.6%, to $2.74 billion from $2.62 billion, mostly due to strong demand for wireless equipment.

Nortel still spends around 18% of its revenue of $2.70 a share on research, so it’s more profitable than it seems. This high commitment to research should help Nortel develop new products to spur growth, and help it achieve its goal of capturing 20% of the markets it competes in.

The company hopes to make its products more appealing to businesses with a new, long-term alliance with software maker Microsoft Corp.

The two companies aim to make communication systems that will let workers easily share voice, email and video information, in any location using any device. The market for such a system is small right now, but Nortel feels that this partnership will give it a first-in advantage.

Nortel is also selling operations in fields where it does not have the size to compete effectively. For example, it has agreed to sell part of its wireless infrastructure operations for $320 million. These operations account for 10% of Nortel’s total revenue.

The company will probably use the proceeds to pay down its $3.75 billion in long-term debt, which is equal to 3.2 times equity. Nortel has roughly $1.9 billion ($0.44 a share) in cash.

The stock is still highly volatile, and trades at 117.0 times its 2006 forecast profit before unusual items of $0.02 U.S. a share. But it should move up now that it has put most of its accounting and legal problems behind it. Like Gennum, Nortel could become a takeover target, or merge with another telecom equipment maker to cut costs.

Nortel is a buy.

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