With Nortel (NT:NYSE) sliding to below $1 yesterday, it now has a market cap of less than $500-million. But is it cheap?
The answer is yes and no. On the surface, Nortel seems inexpensive given it has about $10-billion in sales. However, if you scratch beneath surface, there are several issues to take into consideration.
Perhaps the wildcard is Nortel’s pension deficit, which is now $1.2-billion. With global equity markets down significantly, Nortel’s pension budget could skyrocket. National Bank Financial analyst Kris Thompson suggests a 30% decline in equity value and a 5% increase bond value could increase Nortel’s pension deficit to $2.3-billion.
Using that pension deficit in our sum-of-the-parts analysis would result in a share value of zero. The stock market could reverse recent losses, which would help to reduce Nortel’s pension deficit.
Although that’s a pretty bleak statement, the pension deficit – as another analyst noted – is only a snapshot at this point in time. If equity markets rebound, Nortel’s pension deficit will go down.
In the near-term, the big question facing Nortel is whether it will have to use any of its cash reserves to deal with a growing pension deficit. Thompson suggests that Nortel may need to inject $391-million of cash in 2009, compared with $331-million in 2008.
1) I don't know if this will actually happen. 2) I don't know how it would affect Nortel as a Canadian AND US listed company. 3) Yesterday's huge up day in the marketsprobably made this issue much less urgent for NT.
Should have sold in Feb 2004
I read that companies currently have 5 years to make up pension deficits and the proposed legislation will extend this, making pension deficits less burdensome on companies; so, I don`t think the pension deficit is a major concern.
Should have sold in Feb 2004
I read that companies currently have 5 years to make up pension deficits and the proposed legislation will extend this, making pension deficits less burdensome on companies; so, I don`t think the pension deficit is a major concern.
Nortel’s Pension Deficit a Wildcard
With Nortel (NT:NYSE) sliding to below $1 yesterday, it now has a market cap of less than $500-million. But is it cheap?
The answer is yes and no. On the surface, Nortel seems inexpensive given it has about $10-billion in sales. However, if you scratch beneath surface, there are several issues to take into consideration.
Perhaps the wildcard is Nortel’s pension deficit, which is now $1.2-billion. With global equity markets down significantly, Nortel’s pension budget could skyrocket. National Bank Financial analyst Kris Thompson suggests a 30% decline in equity value and a 5% increase bond value could increase Nortel’s pension deficit to $2.3-billion.
Although that’s a pretty bleak statement, the pension deficit – as another analyst noted – is only a snapshot at this point in time. If equity markets rebound, Nortel’s pension deficit will go down.
In the near-term, the big question facing Nortel is whether it will have to use any of its cash reserves to deal with a growing pension deficit. Thompson suggests that Nortel may need to inject $391-million of cash in 2009, compared with $331-million in 2008.
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