The Bulls Are Still Around

The Nortel saga has really served to expose the lack of depth and insight in the majority of the analyst community. Seriously, how do these guys justify their worth? It's gone beyond entertaining to read their forecasts and the associated reasoning.

It seems that these pundits only have three sources of information: Their own spreadsheets, Nortel press releases, and Nortel financial reports. There is a dearth of Nortel key customer input (!) and very little mapping of industry activity to Nortel execution. It's like they all think they will analyze the financial reports better than the next guy and find some hidden 'buy' or 'sell' signs in between the lines.

I think the reason the analyst community has such a hard time with Nortel is because Nortel used to be a force to be reckoned with and the analysts keep thinking that that has something to do with future prospects. It doesn't.

Here is my free advice to those who are trying to figure out where Nortel is headed:

1. The old Nortel is long gone. The corporate entity might be >100 years old, but that means absolutely nothing to today's business. The leadership is new and was brought in from outside. None of the GEniuses was involved in Nortel's previous successes so it is illogical to think that Nortel's past successes are any indication of future potential (Optical is a bit of an exception). Most of the top R&D leadership is also long gone which just reinforces the break from the past.

2. When evaluating Nortel's operating improvements, stop measuring them against Nortel's previous performance. That's like driving with a rear-view mirror. Measure performance against industry competitive benchmarks. That's a measure of how you're doing versus where you need to get to instead of where you've come from. That's what matters at the end of the day.

3. Go talk to a sample of Nortel's big customers. The kind that pay the rent. Ask them where their spending priorities will be over the next 5 years and map that to Nortel programs. Ask them how they would rank Nortel in each of the major spending areas and ask them if this position is on an upward trend or a downward trend. Ask them how much of their loyalty and support for Nortel is based on a need for ongoing support of the installed base versus.

4. For each of the major spending areas identified in the previous point, compare the level of Nortel's investment with that of Nortel's biggest competitors. And compare the backgrounds and industry reputations of the business leaders in Nortel with those at Nortel's key competitors for each of these opportunity areas.

Now how does the picture look?

Now how does the picture look?

I agree with the jist of your post but I think you neglect to examine the larger picture. Companies will have to be positioned not to be bigger and spend more but to be lean and more efficient. Cisco and Juniper might be there, but Alcatel-Lucent, Siemens and others just aren't there. The infrastructure industry is now fully transitioning to a globalized model where the key competitors will be companies like Huawei. Relative to traditional telecom equipment providers, Nortel is much better positioned to be a nimble company. They will survive based on the sole fact that no one wants to pay Cisco or Juniper's premiums in a market where price deflation must and will occur because of Huawei, ZTE etc. Globalization and rising commodity inflation means deflation across the board. Companies just won't have the ability to pay for Cisco's 60+% gross margins.

Nortelhand – Great analysis. I believe equities in general will flounder for some time yet. Values will be re-determined based on pricing and global competition. This is precisely why I stated Cisco was entirely overvalued relative to others in the sector.

Cisco is far better positioned to weather the storm than Nortel.

Gee…lets state the obvious. We all know Nortel is not in Cisco's league. Hence the partnerships with Microsoft and IBM. Right now Cisco is trying to diversify but failing miserably. They are trying to become like an IBM or Microsoft. This is how Intel got into trouble when it tried to do things outside of its core competence. Any company that tries to be all things to all people usually gets itself into trouble. Cisco will be no different. Cisco has much bigger problems than Nortel. They are named IBM, Microsoft and Google.

A couple of comments:

Nortel nimble? By what measure? To me, nimble implies TTM relative to the competition. Sorry, I don't see it.

Alcatel is in almost as much trouble as Nortel. Probably just as much trouble in North America, but I think the International (Alcatel) side of the business gives them an edge.

Cisco is far better positioned to weather the storm than Nortel. They're diversifying into growth business areas while effectively continuing to leverage their market share dominance in the core businesses. And look at their free cash flow.

The green campaign will backfire as soon as one of the new players applies it to the Carrier segment. Nortel will be in the awkward position of explaining why it's important in the Enterprise network context but not in the Carrier network context.

Nortel is in a tough stop. Not well positioned to win on price, not well positioned to win on market share, not able to 'invest to win' in the new new areas, not much thought leadership left to attract attention, and production-oriented versus visionary leadership.