Remember Nortel (NT)? During the go-go days of the technology bubble, shares of the telecom equipment maker sold for close to $90. These days, the shares are trading at around $2.25.
A seeming unending supply of bad news – an accounting scandal, high profile firings of its CEO and top executives, a series of earnings restatements and a costly shareholder lawsuit – have plagued the company and put its investors through the wringer.
Still, there are signs that the company is getting back on its feet. Nortel is finally caught up with its financial reporting and has settled its lawsuits.
Assuming there no more cleaning closets filled with unpaid invoices, the company's new management team can now look to rebuilding the company.
But, if you think Nortel is about to show signs of its old glory, you had better think again.
While the management team is headed in the tight direction, it's going to take a long time to right this badly battered ship.
For starters, Nortel continues to produce lousy results. Sales of wireless data equipment fell 4% last quarter, and sales at its cellular equipment business plunged 11%. These businesses account for nearly half of Nortel's total revenue. Gross margins fell by 4%. One bright spot is voice over packet-switched Internet technology, where sales increased by 10% last quarter.
Even with its accounting and legal problems, hopefully behind Nortel, it is up against fierce competition. Nortel is a generalist that continues to lose out to specialists such as Cisco (CSCO) and Juniper Networks (JNPR). With their sights fixed on Internet networking technology, these companies will put the squeeze on the one business area where Nortel is making money.
At the same time, the telecom equipment industry is rapidly consolidating. This year, we've seen Alcatel (ALA) agree to merge with Lucent (LU), and Nokia (NOK) with Siemens (SI). Pundits worry Nortel could get left without a partner.
Then look at Nortel's growth prospects. In its most recent set of guidance, Nortel's CFO spoke of "high single digit growth" coupled with some minor margin improvements. Considering competitors Nokia and Juniper produce 10% growth in a bad quarter, Nortel isn't giving investors much reason to get excited.
Nortel's new management has a tough job ahead. Layoffs and a pension program freeze are in the works, and don't be surprised if Nortel shuts down underperforming product lines. All the same, companies like Nortel don't change overnight. It is going to take more than a few quarters to see positive results. Until then, I wouldn't give Nortel much more thought.