Nortel Update: Paradigm Capital Is Bullish, Columnist Takes a Shot at CEO

Richards Ultra-Bullish on NT; Sees $50 Stock Price

I'm not sure what Paradigm Capital analyst Barry Richards envisions but a morning research note this morning leaves no doubt he’s ultra-bullish on NT.

In initiating coverage, Richards has a “buy” rating on Nortel (NT) with a target price of $23 - sharply higher than the current high of $15.50 and median target of $10 on Yahoo Finance. Richards describes Nortel as “profoundly undervalued today”.

Longer-term, he believes the shares could hit $50 based on the thesis it could trade at 1.7-2.0x FY10 sales, compared with 0.5x in 2008.

Here’s his entire note, entitled “Back to the Future”:

Nortel Networks is one of the world’s largest information technology equipment vendors with a wide range of technologies including wireline telephony, cellular, fiber optics and enterprise networking. Once a C$400b company, Nortel has endured a litany of financial restatements, lawsuits and class action suits.

The popular sentiment towards Nortel continues to be very negative and the stock price is severely depressed. We believe Nortel has resolved the last of
its outstanding extraneous issues and the outlook for the company is vastly improved. Key catalysts could include improved quarterly financials, large contract wins and positive industry related developments including wireless auctions and fiber optic deployments.

The stock trades at the lowest multiples in the industry despite the many operating improvements in recent results, including very encouraging Q1 results. We believe Nortel is profoundly undervalued today, trading with a $4b market cap or just 0.5x FY08 sales and 4.7x EV/EBITDA. We see positive changes in the wireless and internet markets and contrary to popular belief we should see significant carrier investment in these areas over the next 10 years.

We like the new management team at Nortel and with upwards of $1b expected in EBITDA this year, we think Nortel will generate normalized free cashflow this year. We initiate coverage of Nortel with a Buy rating and a $23.00 target, based on 10x FY08 EBITDA or ~1x FY08 sales. Longer term we believe the stock could revisit industry averages of 1.7-2.0x FY10 sales or approximately $50 per share.

Update: 24/7 Wall St. has a post on Richard’s target asking whether it’s “Gutsy or Crazy?”

Mike Z. Gets Zinged

Globe & Mail columnist Derek De Cloet takes a healthy run at Nortel CEO Mike Zafirovski, suggesting that despite all the work over the past 2+ years, Mike Z. is not doing enough because Nortel’s stock price has performed badly during his time at the corporate tiller.

The column is interesting because while Nortel has been slammed by critics for its accounting troubles and financial results, Mike Z. has pretty much stayed above the fray. This is partly because he looks like a star compared with his predecessors, Frank Dunn and Bill Owens. As well, many people acknowledge Mike Z. had a huge clean-up job to do after taking the helm in late-2005, and that the assignment continues as Nortel looks to reduce costs to remain competitive.

While shareholders may appreciate Mike Z.’s efforts, the reality is Nortel shares have dropped from about $4 to 81 cents when a 10:1 stock consolidation is taken into account. For many critics, that is the bottom line even though Nortel’s bottom line is improving.

In addition to a soft economy and fierce competition, Zafirovski blames the poor stock performance on skepticism among investors. Until Nortel really shows its on the right strategic path, don’t expect skepticism to disappear any time soon.

More: ITbusiness.ca has a look at how Nortel is getting its groove back.

Comments

[User 151885]

I remember when Nortel fell to around $0.45 and there were 2 trades. One for 7 million and the other for 8 million in 2002 or 2003. When it went up to $3.50, I neglected to check if sales of this size occurred. If they did, it was a neat profit.
Before Dunne there was another CEO who sold just before the peak around $190 I believe. When I checked back, I found it was heavily promoted and in the news back then.
Remember, it wasn't long ago they had a reverse split. 1 for 10 or so. And now its being promoted heavily again. There may be some substance to the company once again.
Or, maybe a bunch more are retiring.

[dritanbeqollari/tano]

Salve.Adesso e il tempo colegare con voi,soltanto con trade e ci trova cui a Tirana.