Nortel Stock Up; Analysts Mixed on Outlook

All of a sudden, investors can't seem to get enough of Nortel Networks Inc. (NT).

Shares in the wireless network company are up big for the second day in a row Thursday, following Wednesday's announcement that the company would shift its focus away from fourth generation WiMax technology and concentrate instead on the long term evolution [LTE] wireless standard. Nortel also reiterated its revenue guidance of low single-digit top line growth during an analyst day held Wednesday, and said gross margins are expected to reach approximately 43% on operating margin improvements of nearly 7% year-over-year. 

While applauding Nortel's attempt to put its "best foot forward" after years of underperformance, RBC Capital Markets analyst Mark Sue said the road Nortel plans to take in order to grow revenues and improve earnings growth will be a bumpy one.  He warned investors not get ahead of themselves and reiterated his "sector perform" rating and C$8 price target.

In a note to clients, he said:

Progress will not come without challenges and the company to date has been very inconsistent with its execution. And with industry structure keeping a lid on Nortel's ability to accelerate the top line and reach long term operating margins, we maintain a wait and see approach. 

To start, Mr. Sue said Nortel expects the CDMA and GSM markets to contract by 4% and 8% over the next four years, resulting in a 35% yearly drop in Nortel's wireless revenues over the same period.

Nortel's participation in the large LTE builds will likely come with price concessions, he said, adding, Nortel also sees wireless OMs declining somewhere between 13% to 16% from 24% as LTE & WiMax margins will be below CDMA margins.

On the flip side, Nortel said it can grow revenue from core multimedia applications such as VoIP by more than 8% with 4% margins currently improving to somewhere between 16% to 19%. The company believes it can also grow Metro Ethernet by 10% with operating margins potentially expanding from 5% to 16-19%.

Meanwhile, Chris Umiastowski, TD Newcrest analyst, remains bulllish on Nortel and maintained his "buy" rating and C$13 price target. 

He said:

We walked away from the [analyst day] with more confidence in the management team and we heard a lot of detailed information that backs up management's plan to dramatically boost operating margin. We have never before seen Nortel possess such strong focus on profitable execution of its business plan.