Richards Ultra-Bullish on NT; Sees $50 Stock Price

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Richards Ultra-Bullish on NT; Sees $50 Stock Price

By Mark Evans | June 6, 2008

Not sure why Paradigm Capital analyst Barry Richards envisions but a morning research note this morning leaves no doubt he’s ultra-bullish on NT.

In initiating coverage, Richards has a “buy” rating on Nortel with a target price of $23 - sharply higher than the current high of $15.50 and median target of $10 on Yahoo Finance. Richards describes Nortel as “profoundly undervalued today”.

Longer-term, he believes the shares could hit $50 based on the thesis it could trade at 1.7-2.0x FY10 sales, compared with 0.5x in 2008.

Here’s his entire note, entitled “Back to the Future”:

Nortel Networks is one of the world’s largest information technology equipment vendors with a wide range of technologies including wireline telephony, cellular, fiber optics and enterprise networking. Once a C$400b company, Nortel has endured a litany of financial restatements, lawsuits and class action suits.

The popular sentiment towards Nortel continues to be very negative and the stock price is severely depressed. We believe Nortel has resolved the last of
its outstanding extraneous issues and the outlook for the company is vastly improved. Key catalysts could include improved quarterly financials, large contract wins and positive industry related developments including wireless auctions and fiber optic deployments.

The stock trades at the lowest multiples in the industry despite the many operating improvements in recent results, including very encouraging Q1 results. We believe Nortel is profoundly undervalued today, trading with a $4b market cap or just 0.5x FY08 sales and 4.7x EV/EBITDA. We see positive changes in the wireless and internet markets and contrary to popular belief we should see significant carrier investment in these areas over the next 10 years.

We like the new management team at Nortel and with upwards of $1b expected in EBITDA this year, we think Nortel will generate normalized free cashflow this year. We initiate coverage of Nortel with a Buy rating and a $23.00 target, based on 10x FY08 EBITDA or ~1x FY08 sales. Longer term we believe the stock could revisit industry averages of 1.7-2.0x FY10 sales or approximately $50 per share.

Update: 24/7 Wall St. has a post on Richard’s target asking whether it’s “Gutsy or Crazy?”

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