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Umiastowski Shocked by MEN Decision
By Mark Evans | September 18, 2008
Nortel’s decision to sell its Metro Ethernet Network business is a real puzzler to pretty one everyone it seems except Nortel’s executives.
In a research note, TD Securities analyst Chris Umiastowski said he was “shocked” by Nortel’s decision given MEN is seen as the company “crown jewel” and its 40GB optical transport technology has been a big success since its launch last quarter.
“The MEN business does about $1.5 billion in sales per year, and we are told it is operating at approximately break-even. We’ve been bullish on this business unit and believe Nortel has been taking back market share. Selling the business now is a bad move, in our view. It won’t significantly alter the company’s profitability, and it hurts future growth. Unless Nortel can get close to 1 times sales for the business, we are not convinced it will help the valuation much to sell it. We would rather see the company divest its Enterprise business and focus solely on carriers.”
Umiastowski has downgraded Nortel to a “hold” and slashed his target price to $3.50 from $10.
“Two major holes have been shot in our bull thesis. They both relate to revenue growth. First, the change in outlook really takes the wind out of the sails on near-term growth. Without stable to slightly growing revenue it is very difficult for SG&A cuts to turn into EPS growth. Second, the sale of MEN takes away longer term growth potential that we feel the company needs to fight the weakening wireless business. We are not left with a catalyst that we feel can strongly support a buy recommendation.”
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