Nortel: Buy, Sell or Both?

The days of a herd mentality within the community of equity research analysts seem to be long gone, or at least not as prevalent.

On Thursday, for example, two analysts published starkly different calls on Nortel Networks (NT). One said that it is going to rise from $10.50 to $23.00, and the other thinks that it is going to fall to $6.40.

This from Paradigm Research:

 

Don’t Shoot the Messenger

Yesterday, Nortel hosted its first full analyst day in two years and delivered a series of very bullish presentations on the outlook for revenue growth, profitability and free cashflow. We were most impressed by the impact of the new Business Transformation Team, lead by Joe Flanagan and Denis Carrey a pair of long time GE alumni (38 years combined) recently transplanted into Nortel. This team, along with CEO Mike Zafirovski, are radically streamlining the operations at Nortel and are obsessed with extracting cost and inefficiency at the company, in a way we have never seen before at Nortel.

Seven hours of presentations basically revolved around three common themes across all business units: growing revenues, increasing operating margins and generating free cashflow. The biggest changes expected by management include much stronger performance from the two money losing businesses, Enterprise Solutions and Metro Ethernet (optical). These two businesses are expected to average 10-12% revenue growth from 2007 to 2011, with operating
margins increasing from negative today to a range of 12-19% (12-16% for ES and 16-19% for MEN respectively) by 2011. These projections are so remarkable that will face some skepticm from investors initially but were explained in and supported with excruciating detail, which lead us to believe the shift is well underway.

Another major theme of the day was confirmation that Verizon will continue to be the biggest sponsor and supporter of Nortel technology on the carrier ethernet side (announced earlier in the day), with further wins in optical and wireless also alluded-to in upcoming releases.

Overall, we believe the analyst day was supportive of our bullish views on Nortel and may convince others that the business at Nortel is profoundly better than the current share price implies. As a result, we continue to rate the stock a Buy with a $23.00 target.

 

Then there’s the other side of the story from GMP Securities:

 

Investor Day Update: Management optimistic on size of market opportunities and efficiency programs.

Overview: CEO and executive team remain bullish about growth from new technologies (new 40 Gig optical and next-gen wireless LTE) and efficiency programs. Nortel committed to 13% operating margin by 2009.

Positives: NT’s optical unit appears to be ramping up new sales opportunities and profitability for this segment could be restored soon; NT’s new head of sales emphasised much progress can be made to boost sales effectiveness; New CFO sees opportunity for cost controls and working capital improvements.

Points to Watch: We will watch for sales growth and a return to profit in the Enterprise business; We are cautious about the time to volume in next-gen LTE wireless; We have yet to see gross margin improvements or efficiency programs carry though to cash generation.

Impact: Neutral. We see no substantial change in fundamentals and make no changes in our forecasts or valuation. We maintain our disciplined valuation of 9x 2009 EPS of US$0.71, resulting in target of US$6.40. A forecast for negative returns results in a REDUCE rating.

 

 

This is what makes a market. Let’s applaud both analysts and their firms for being courageous on both ends!

Disclosure: None