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No. of Recommendations: 0
In reading the Foolish Collective board, it was mentioned "What to do with NT?" Here's the thread to that discussion:

I went and pulled up its chart and was surprised to find that NT has a near 30-year history. Moreover, it has been beaten up, down and sideways recently because of wrongdoing by its management, who have since been fired "for cause" (see thread above), and they are also under SEC investigation.

I charted their stock and find that they are near some historic lows. While their most recent low CAGR seems to be at 0.8% (whereas the current CAGR is 5.3%, I think their true "historic" lows are more around 8.0%.

I'd be interested in seeing what some other Beemers have to say about NT.

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No. of Recommendations: 5
Hi Rich,

Hmmmmm ... first off ... the NT CAGR chart doesn't show what I would call a discernible, much less exploitable trend. For me, I want to see our CAGR charts with a clear long term trend so that I have some comfort predicting its continuation. But then again, since I howl at the moon at lot, so maybe my requirements should be viewed in that light <smile>?

Next, while I haven't done what I consider reasonable DD (to me that means looking at a host of fundamental factors and how they have fared over the past 2 to 5 years by Q) especially in terms of their primary competitors, the thread from FC has me not even bothering. SEC investigations, firing upper managment, an apparant history of that sort of thing, ... One might wonder what use you think red flags might have <lupine grin>? IF there was some reason I wanted to more seriously look into this company (A bottle of vodka recently consumed for instance), I might also look at how long the various board folks have been there and what if anything they have been saying year on year. Who made the bad decisions and what indication is there that anyone aboard the ship knows in which direction to be bailing?

Can ya tell yet I lean towards the notion that NT is more caninelike than I care for <smile>?

I do understand that there exist viable investment strategies that involve picking turnarounds, exploiting Mr. Market's tendency to over react in the short term, etc., but in terms of BMW type things, I'd avoid NT like I do 2 leggers toting telescopic sights <smile>. The momentum TAish side of me also would pass on NT, Catching falling knives and all that. Unless of course one is in touch with their dark-side ... and would consider NT as a short candidate?

So why is it you thought / feel NT is worth a BMW look, or any sort of look?

Take care,
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No. of Recommendations: 2

I just ran a quick Piotroski test and NT passed on one of the nine criteria. The test they passed was #9-Increasing margin in most current quarter to last full year. Interesting the full year 2003 numbers are not on Morningstar or Hoovers. This fact makes we wonder why they have not posted 2003 numbers yet.

With all that said, when I looked at some of the TTM and current quarter you do see some significant improvements. For example, they have decreased their loss per share from (8.56) in 2001 to (.08) for TTM using continuing operations numbers. That is moving in the right direction.

I would not invest my money at this time. I would wait for the 2003 financial to take a look. I would also make sure that all the management that caused the problem were gone.

Cheers, Gary
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No. of Recommendations: 2
NT looks like a very high risk candidate to me. Last week they fired the three top executives in the company including the CEO. This was due to a SEC investigation into accounting irregaularities at the company. The company also announced that they are going to have to restate earnings for the second time in seven months. Of course these announcements started a bombardment of class action suits.

So the stock may be beaten down but it looks like a company with lots of problems.

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No. of Recommendations: 7
As an ex-Nortel employee (I left in mid-2000 a few months before the bubble burst), here's my spin on it. When the bubble burst, spending on telecom equipment virtually stopped, especially in the optical area where Nortel dominated. That is why Nortel crashed so hard.

Telecom providers will have to increase their spending at some point just in order to maintain their networks, and will have to increase that spending further in order to keep up with the growing demand for data (just look at the increasing penetration of broadband access). The telecom providers are a pretty savvy bunch (especially the RBOC's in the U.S.). On the one hand, they need strong equipment providers who are capable of building and supporting large networks of complicated and high-availability equipment, on the other hand, they can't allow any vendor to become strong enough that they gain pricing power over the carriers.

They balance those two requirements by buying best-of-breed equipment from a limited number of vendors while demanding full interoperability.

The key to that statement is the 'limited number of vendors'. They don't want to deal with a lot of small vendors because that increases their risks. They only want to deal with a few large vendors, and once they establish a relationship, they want to maintain it (because they have millions of dollars invested in that vendor's equipment, and they don't want that vendor to go under because they need support for that equipment).

The upshot of this is that when spending returns to telecom equipment, Nortel should get it's share.

Regarding the accounting scandal, let's be clear about what we know. When Nortel collapsed, they got rid of 2/3 of their employees (along with 2/3 of their office buildings, computers, etc) and nearly all of their manufacturing. They had to estimate what it would cost to divest those things, and when they did that they overestimated. This resulted in reported losses in 2002 being worse than what they actually were. When the actual costs were known, the books were adjusted making the early quarters of 2003 look better than what they actually were.

It's possible that more problems will be found, but we have a strong statement from the new CEO that current cash reserves will not be affected by the restatements, so my guess is that the restatements will only modify when revenue and expenses are recognized and not alter the aggregate amount of revenue and expenses.

Based on that, I'm taking a substantial position in Nortel. I believe that:

- the accounting scandal has been overblown
- the underlying business is currently sound (and returned to profitability well before its major competitors Lucent and Alcatel).
- it is better positioned to take new revenues (especially in VOIP and wireless) than its major competitors
- startups have been killed off in the telecom slump, and large carriers prefer to continue buying equipment from their incumbant vendors
- the lack of buying in the last four years means there should be an increase in spending in the coming years, and there is a good chance we will see a spending echo once spending returns

I'm not trying to convince anyone else to buy Nortel, but that's what I'm doing, and this is why I'm doing it.


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