Nortel Networks Corp. $7.26 – Toronto symbol NT

NORTEL NETWORKS CORP. $7.26 (Toronto symbol NT; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 437.2 million; Market cap: $3.2 billion; SI Rating: Speculative) is one of the world’s largest makers of telecommunications equipment. The company sells its products mainly to telephone companies, cable TV operators and large organizations.

The telecom industry is highly competitive, and recent mergers among telecom equipment suppliers have driven down prices. The slowing economy has also prompted telephone companies and corporations to maintain their current networks instead of investing in new equipment.

In 2007, Nortel lost $957 million or $1.98 a share (all amounts except share price and market cap in U.S. dollars). That figure included a $1.1 billion (pre-tax) non-cash writedown of a deferred tax asset. Excluding all one-time items, Nortel earned $0.37 a share in 2007. The company earned $28 million or $0.06 a share in 2006.

Revenue fell 4.4%, to $10.9 billion from $11.4 billion, as it shifts from traditional telephone networking equipment to higher-margin wireless products and other technologies.

Nortel cut its research spending 10.5% in 2007, to $1.7 billion (15.7% of revenue) from $1.9 billion (17.0% of revenue) in 2006. That’s because it’s shifting research spending away from supporting older products to new, emerging technologies.

The company continues to cut its costs in the face of weak sales growth. Nortel’s latest restructuring will cut its work-force by 6%, and shift more operations overseas. It will cost roughly $525 million, but should reduce annual expenses by $300 million. Despite its problems, Nortel’s improving balance sheet will help it overcome these setbacks. While long-term debt fell 13.6% in 2007, to $3.8 billion from $4.4 billion, that’s still high at 1.1 times its market cap. However, Nortel also holds cash of $3.6 billion or $8.25 a share.

The stock is down 70% from its recent peak of $29 in May 2007. The company will probably earn $0.50 U.S. a share before one-time items in 2008, and the stock trades at 14.3 times that figure. However, Nortel will likely make little progress until the overall economy improves.

Nortel is a hold.

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