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Tickers in this Article: NT, CSCO, VZ, T, S, AT, MOT, ALU, ERIC
I hate to kick a stock when it's down, but it's hard to fathom that telecom equipment-maker Nortel (NYSE:NT) will ever turn things around. Third quarter revenue was down 12% sequentially and 14% from last year. Its bleak collapse is painful to watch.

Significant damage showed up across product lines. Carrier network revenue plunged 21% for the third quarter and 24% year-over-year. Meanwhile, revenue from Nortel's enterprise solutions sector grew 1% during the third quarter, but was down 8% from the same period in 2007. Nortel's global services were down 5% sequentially and 6% year-over-year, while its metro ethernet unit fell 16% in the last quarter and 12% from the same time last year. Orders in the third quarter stood at $2.017 billion, down from $2.153 billion in the previous quarter and $2.377 billion a year ago.

The stock has taken a clobbering, too. Trading at less than $1, or about 95% below its 52-week high, the stock could fall further still.

Brutal Business
The outlook for the telecom-equipment business is downright dismal. Following industry-wide consolidation activities, including the Alcatel Lucent (NYSE:ALU) merger, too many equipment-makers still chase too few customers. Nortel faces stiff competition from Ericsson (Nasdaq:ERIC), Motorola (NYSE:MOT), Cisco (Nasdaq:CSCO) and China's Huawei Technologies.

Meanwhile, mergers of telecom carriers, including Sprint's (NYSE:S) buyouts of Nextel and Clearwire, SBC Communications's purchase of AT&T (NYSE:T) and the recently approved takeover of Alltel by Verizon (NYSE:VZ), have left only a handful of equipment buyers. But in the face of a darkening global economy, the remaining carriers are bound to continue efforts to slash spending.

Looming Cash Crunch
Nortel is burning cash by the boatload. The company's balance sheet shows that cash is being gobbled up at a rate of about $700 million per year. If cash outlay persists at this rate, Nortel will be left with $1.3 billion in cash ahead of a $1 billion debt repayment due in 2011. (To learn more about balance sheets, check out Breaking Down the Balance Sheet.)

Analysts at Toronto-based National Bank Financial estimate that, with the equity markets in turmoil, Nortel's pension deficit could balloon to $2.3 billion - almost twice the $1.2 billion reported for the end of 2007. As a result, Nortel now faces real danger of not having sufficient cash to meet its pension funding requirements.

Like many companies struggling for air in this down economy, Nortel is taking steps to restructure, including laying off 1,300 employees. While layoffs may address some of Nortel's more pressing concerns, many more cuts will be required to get the company back on secure footing.

Breaking Up Is Hard To Do
Some investors speculate that Nortel will be broken up and sold off in pieces. Perhaps, such an option could be the only way for Nortel to stanch the hemorrhaging and restore some share value. But in the current market environment, the chances of that happening anytime soon are unlikely. Back in September, Nortel announced that it would sell its metro ethernet division. So far, Nortel has had no takers. Earlier this year, Nortel was rumored to be in talks to combine its wireless unit with that of struggling Motorola. Those talks so far have not borne fruit.

Bottom Line
It's hard to be optimistic about Nortel's prospects. The company is at the point of managing its business primarily to conserve cash and to avoid defaulting on debt. As customers hold back on spending, the situation will worsen into very serious problems for Nortel by early next year. Therefore, steer clear of Nortel.

For related reading, check out Corporate Bonds: An Introduction to Credit Risk.

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