Nortel can't escape the telecom gloom
Copyright 2002 Toronto Star Newspapers, Ltd.
The battered share price of Nortel Networks Corp. could fall 40 percent and the company may have to restructure again because of a drop in telecommunications-sector spending, analysts say.
After the high-tech giant lost more ground on the stock market yesterday, ending a dismal week in which it shed 15 percent of its value and its debt was downgraded to near-junk status, analysts warned that things could get worse.
"The general outlook for (telecom) spending raises questions as to whether there might be a need for further adjustments at all the equipment providers," said Bob Ray, senior vice-president at Moody's Investors Service in New York.
But any changes won't be near the magnitude of earlier restructuring, he said. In 2001, Nortel cut 48,500 jobs, about half its workforce.
Wall Street brokerage UBS Warburg said yesterday that Nortel's stock could fall as much as 40 percent from its current level of slightly more than $5 (U.S.).
While UBS slashed its 2002 price target for Nortel shares to $6.25 from $7.50, the brokerage said "downside risk can be as low as $3 in the extreme case."
Nortel shares closed in New York at $5.13, down 8 cents. On the Toronto Stock Exchange, Nortel fell 19 cents (Canadian) to $8.01, down $1.46 since last week.
At the peak in July, 2000, Nortel stock traded above $124 on the Toronto Stock Exchange.
The focus turned to the company's workforce yesterday after a news report, citing an internal memo, said the Brampton-based firm was cutting 350 jobs at its Maidenhead plant near London and may cut more deeply within months, possibly including operations in Ottawa.
However, Nortel spokesperson Tina Warren said those cuts are part of the layoff number announced last year. All the cuts are expected to be done by the end of the first quarter, Warren said, when Nortel will have a workforce of 48,000.
Frank Dunn, Nortel's chief executive, told analysts last week that further "major restructuring" won't be necessary, although he left room for less dramatic cuts.
A continued spending decline by big telecom companies, which appears to be worsening, is adding to the view that more restructuring is likely at Nortel. Analysts expect spending by telecom carriers to fall about 30 percent in 2002, compared with last year.
Yesterday's negative news, on top of a downgrade by Moody's earlier in the week to one notch above junk status and a revenue warning by rival Lucent Technologies, sent Nortel's shares plummeting.
"We see no compelling fundamental catalyst to propel the shares from these levels," UBS Warburg said. "Additional risks include: further debt downgrade and potential unspecified cash payments to contract manufacturers."
UBS Warburg also cut its revenue and earnings estimates.
The brokerage expects the company's first-quarter revenue will be slightly below Nortel's target of a 10 per cent decline from the fourth quarter. As well, it expects earnings will be flat.
Nortel CEO Dunn has said the company would return to profitability in the final quarter of this year.