Mark Evans

Is Nortel Back?

Looks like investors are back on the Nortel Networks bandwagon as the stock climbed 13% yesterday after the company posted better-than-expected second-quarter results. Still, a rule of thumb is using Nortel shares as a proxy for the company's prospects is a dangerous game. Investors thought Nortel was going to dominate the telecom equipment market when its stock hit a high of $124.50 in July 2000, and they expected it to file for bankruptcy protection when the stock bottomed out at 67 cents in 2003. Of course, niether scenario materialized. What Nortel demonstrated more than anything yesterday was things have hopefully returned to normal, and there will not be many unexpected surprises going forward. Mind you, “normal” in the equipment business is a difficult concept to pin down given the growing competition from low-cost suppliers in China, as well as the usual global suspects - Alcatel, Cisco, Lucent, et al. For all the progress Nortel has made in righting itself financially over the past year, there are still significant challenges ahead. These include a further reduction in costs, which may include more job cuts as its attempts to lower operating expenses to 30% of revenue by next year. The company also needs to make a few strategic moves/deals to position itself in high-growth areas such as access and routers. It would also be nice for CEO Bill Owens to lay out a strategic vision other than the focus on the U.S. government, security and services.
Ronald Gruia provides some good insight into Nortel's second-quarter results. He points out, for example, that while Nortel's enterprise unit enjoyed strong growth, rivals such as Cisco, Avaya and Mitel had saw healthy sales.