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      • « Beefing Up MEN | Main | S&P Affirms Nortel’s Ratings »

      What Was Mark Sue Thinking?

      By Mark Evans | November 21, 2008

      Putting aside the performance of Nortel’s stock, I’ve been thinking recently about Mark Sue’s decision to slash his target price to zero.

      In retrospect, it strikes me as an irresponsible decision because it suggests that Nortel as an operating entity is doomed with no value. As much as Nortel is troubled and has its financial and strategic challenges, Sue is making a huge assumption that can only be described as extreme.

      The question is what does Sue see that others don’t. Even a bearish analyst such as National Bank’s Kris Thompson has a 50 cent target price, while the average target price - according to Thomson/First Call - is $1.10.

      Maybe Sue is frustrated after having being forced to continually lower his target price, or perhaps he believes Nortel’s prospects are, indeed, bleak. You do have wonder, however, why he stands alone in his ultra-bearish approach, and why zero seemed like such a reasonable number.

      NT Analysts

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      Viewing 34 Comments

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        Mark,

        The company makes no money. Has not made any money in years. It can't sell the assets it has to meet basic needs. And it face massive liabilities in both pensions and debts that it can't possibly meet through its existing cash flow. Management has lost any credibility that it can grow the business to meet these goals moving forward. The value of the shares with its future business prospects are dismal.

        The next 2-3 quarters will be financed out of debt that Nortel is blowing through. The Bond holders will demand major changes in future when they're unable to recoup their investment. Either that or another Debt Syndicated will come in with a mixture or Debt/Ownership to get past the 2011 liabilities.

        No matter how you look at this, Nortels shareholders have only one business segment (enterprise) worth speaking of and to many liabilities to make a go of it. The stock has been worthless for a bit, Mark Sue is only the first with guts to say so.
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        Hmmm...sounds like an enterprise pumper.
        Your name joel hackney?
        So tell us how enterprise is worth speaking of keeping in mind the intense competition in that LOB and the fact nortel are a tier 2 player in this space.
        Now are you suggesting the enterprise division at NT will be bought by Microsoft, IBM or somebody else?
        Please tell us how it is worth speaking of?
        And NT does make money, they just owe more than they make.
        You could kind of look at it like somebody who has to spend a dollar to make fifty cents. Definitely not a way to run a business or get ahead but they do "make" money in a sense.
        Based on your opinion they will be bankrupt or in receivership in 09.
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        No idea who Joel Hackney is.

        Nortel is a competitive Tier 2 player in the enterprise space. They have consistent margins and this is a money maker for the company.

        They have a significant installed base and good products. Their R&D burn is tiny in comparison to their other initiatives and they have happy customers coming back for new products as their systems sport a 10-20 year lifecycle. This is a great business for Nortel but it can't save the company. Mike Z and his (GE)policy of only remaining in spaces where NT can be the consistent #1 or 2 isn't a strategy that works in Telecom.

        No thoughts on MSFT or IBM buying them. I'd point out that MSFT's partnership with them is shallow, and has very little depth. the IBM arrangement is as i understand a reseller partnerhship, so also very shallow in terms of technology integration. For example MSFT has a similar UC agreement with Mitel and IBM works with AVAYA.

        As far as bankruptcy goes, I don't know. My original statement (or thoughts were) that shareholders currently can expect little to no value for their ownership. Its the debt holders who are funding the company and are ultimately first in line to decide where things go from here. If shareholders were funding operations out of profits or cashflow things would be different.

        As all analysts give recommendations for future value based on current prospects and track records a fair statement is this: The current prospects are dismal and Management's strategic direction has been flawed for the past several years. Management has made this situation what it is (worse) and has a dismal track record and probably won't be able to turn the ship around ergo - the stock is worthless. Mark Sue is correct. Will that mean bankruptcy or a massive dilutive event - no idea.
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        Hmmm...sounds like an enterprise pumper.
        Your name joel hackney?
        =====
        re
        No, he is not Joel. His name is Matt Roberts.
        It requires only average IQ to get it.
        But when we click on your ID we see the long list of names


        aliases

        * Realist
        * SexyBeast
        * Sexy Beast
        * Plastered
        * plastered
        * Limeoid.
        * Hogan
        * Daniel
        * JoeFriday
        * Clint
        * Eli
        • ^
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        tsk tsk tsk, poor poor yes4aapl, to think that having 1 alias gives him much more credibility than having many. but aren't we all hiding behind our alias(es)? perhaps if you revealed your identity like Mark Evans and Matt Robers perhaps you'd get to be in a position to say this.
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        Haven't I told you in the past to go F**k yourself?
        Is this deja vu?
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        PENSION DEFICIT?

        And if it needed another problem, Nortel’s already underfunded pension ($1.1-billion at the end of last year) may have more than $500-million in liabilities tied to Metro Ethernet. But with roughly 53% of the $8.1-billion plan invested in equities and assuming a decline of 40%, Mr. Sue noted that the deficit may swell to $2.8-billion.
        ----
        And if it needed another problem, Nortel’s already underfunded pension ($1.1-billion at the end of last year) may have more than $500-million in liabilities tied to Metro Ethernet. But with roughly 53% of the $8.1-billion plan invested in equities and assuming a decline of 40%, Mr. Sue noted that the deficit may swell to $2.8-billion.
        ----
        http://seekingalpha.com/article/105883-r...


        As I see my math is not so bad.
        What Nortel can do about $3 bill Pension Deficit?
        ----

        Pension funds normally have to do a valuation of their obligations and assets every three years, and then plan sponsors have five years to fund shortfalls. However, once federally regulated funds are in a shortfall position, OSFI requires valuations to be done annually. (ANNUALLY)

        Cameron said about half the pension plans OSFI oversees were in a shortfall position prior to this year, so are doing valuations annually. That means a majority of Canada's federally regulated pension funds will be required to do a valuation report at Dec. 31 this year, giving companies no leeway to wait to see whether asset values recover over the next year or two.

        Another pension industry expert said the funding situation is especially exaggerated because pension funds are required to measure their obligations and assets on a "solvency" basis, which assumes a company is going to shut its doors immediately and must fund its pension now.
        https://secure.globeadvisor.com/servlet/Article...
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        Mark, I assume this is a rhetorical question...?

        The only person I can think of off the top of my head that has less credibility than Mike Z is Mark Sue. His 'forecasts' always lag actual market behavior and in this case - the one instance I'm aware of when he tries to forecast ahead of the market - I think his forecast is nonsense.
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        I guest 0 target means that he does not see any value for shareholders. Meaning that NT will probably go on chapter 11, be restructured, sold in parts etc but leaving nothing for the shareholders. Simple as that. The stock is trading now at 40 cents US; under the lowest target of all the analysts. So up to now he looks good in is prediction.
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        Mark, as close as you are to Nortel, there are many of us working there that see a poor decision followed by another, and yet another, and then poor planning, and failed execution. Eight years worth! Before the pre-Q3 and MEN buyer announcement, an opportunity came my way, and I could not turn down the raise. Now I find that I was under-paid, under-rated, and that there are smart, successful companies out there full of energy, optimism, and great management. When I look at what Nortel has become, I have to agree with the zero target.
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        I still think it was an insider joke; zero -z, get it! --bb
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        nope.
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        CEO's last name starts w/Z; just my hunch, thats all...--bb
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        Nortel surviving its current predicament and the value of Nortel's share holder equity are too separate and distinct subjects. I agree with mark that Nortel's stock is basically worthless, but that does not mean that the company is worthless.

        Bankruptcy does not mean the end of Nortel. If managed properly, by a new management team and BOD. Nortel could be restructured into a more competitive and manageable entity. Bankruptcy just might be Nortel's salvation. However, it won't provide any succor to the share holders.
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        There are lots of companies with "active operations" whose stock does actually go to zero.

        To repeat what I have said in earlier posts, the common shares of a company are worth whatever is left over when you take all the assets and subtract all the liabilities. If that number is negative (which it can be for a company that still is operating but has more liabilities than assets) then the value of the common shares is zero. Look at Air Canada -- the common shares went to zero even though it kept flying.

        Mark Sue's target may be "wrong". It may turn out the assets are worth more than the liabilities.

        It may have also hurt employee morale, damaged the company's prospects, and scared some customers. It sure as heck didn't help the share price. But none of those things are supposed to matter to Mark Sue -- his job is to write the best impartial investment advice he can for people who are investing in the common shares. They are the ones who pay him for his research.

        I don't know whether his target will turn out to be true -- but I do not think publishing a zero target was unreasonable.

        BTW, the difference between the consensus target on NT ($1.10) and zero is only about a US$500 million swing in "assets minus liabilities." That isn't really a huge variance between the two views...
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        Zero is zero
        Duncan, you used Proto's example of AirCanada.
        We love that comparison. Even Mike Zet loves it! (links available)
        We call it AC scenario for Nortel.
        We estimated that this scenario is 99% probable now!
        Use BK protection laws to get rid off of shareholders, go away from the public scrutiny, hide and restructure to a new business model!
        Save as many jobs as possible, keep in touch with customers as many as possible, promise them service and upgrades in the new structure.
        Criminal trials are delayed just to give Nortel Corp time to prepare for BK.
        Yes, we have been waiting for criminal trials of ex Nortel's managers for years.
        Judge said he won't wait any longer as the public pressure is rising!
        $380-400 bill is missing!
        That was NT stock market cap!
        Who got that money?
        Not the average Joe Plumber!
        It takes 30 mill average investors to lose $10 000 on NT stock.
        Who got away with $400 bill?
        I know J Roth cashed around $140 mill.
        and I believe he did not know what CFO was doing at that time!
        OK the trials are coming and F Dunn will have his chance to tell the truth and nothing but the truth!
        Mark Sue is just correct this time.
        When you hear a company wants to sell the best assets just to survive another quarter that is the red flag for investors.
        Run away is the best advice!
        There are good stocks, depressed very much now, you can park your money in!
        Why would anyone Buy NT now?
        OH
        those financial institutions lost billions lately on NT ... why they won't use another $300 mill just to average down and take 100% control of the company?
        I think they know what I know and what Mark Sue knows.
        cheers
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        Duncan,

        In my opinion I think Mark Sue was irresponsible in issuing a shareprice target of $0,correct me if I'm wrong but analysts are trained to calculate shareholder equity by a combination of variables that include-1)price earnings,price to earnings growth(PEG),cash flow,cash flow from operations,EBITDA etc... there are a few other metrics but these are the important ones that are used-granted Nortel has done poorly on just about all of them,however with the economy being the wild card here,if Nortel can lower their costs to match the declining revenue outlook over the next 6-18 months or even 24 months or until segments of the economy start to improve with the various stimulous by governments and as a result industry spending ticks upward,then I believe sentiment will not only change,but business units will carry more value,that is price to sales ratios will rise just as they have all fallen over the last 12 months.

        Just to put things into perspective Nortel's current P/S is at 0.02 for the whole business,surely you would agree that there are segments of Nortel's business that are worth more than that.Their ES business although not profitable has shown respectable growth over the last 18 months and the value of it is being smothered by the whole of Nortel and the liabilities under the parent company. Nortel management did not do themselves any favours by announcing their intentions of wanting to divest the MEN business at the worst possible time,especially at the same time they announced futher restructuring,this created the perception that Nortel was "desperate" for cash and started to create doubt in the minds of investors on whether Nortel would make it through this down period,as a consequence all of Nortel's parts are currently being viewed in a possible bankruptcy scenario carrying next to nothing value for all of their businesses,hence the $200 m market cap and Mark Sue's price of $0.

        1)Nortel's Enterprise business at $2.6 b/year and growing can be worth at least 1 x sales to someone who knows what to do with it

        2)Nortel's Services Business at just over $2 b/year is growing and marginally profitable can also be worth 1 x sales to a potential buyer.

        3)Nortel's MEN business is the most underrated asset inside Nortel and with its potential and to a proper strategic buyer can be worth $1.5 x sales or $3b,but for conservative purposes let's use a P/S of 1

        4)Finally Nortel's carrier business at around $4b/year is the problem child,but value can still be found in this business if parts of it were sold of to the appropriate buyer/s,as an example we saw the UMTS unit sold off to ALU for $320m or around .5 x sales-what a difference time can make ,let's apply a P/S of .25 (worst case scenario valuation )seperate from the parent company=$1b

        5)Nortel's cash balance after 2009 should be around $1.55 b

        Total value = $8.65 b
        - current debt of $4.5 b
        ______________________


        net =$4.15 b or about $8 per share


        The key here is that if Nortel can manage their cash position until spending improves then the value of its parts will increase once sentiment improves,these valuations are also calculated under a reasonable liquidation scenario and the only cloud hanging over this is Nortel's ability to manager their cash balance through this slowdown period.
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        The only thing accurate about Psychiatrist is his/her namesake! Like the real world psychiatrists they will invent long, complex and rambling explanations to deceive people from the simple truth of the matter.

        Truth is that the market does not lie! Market might be wrong during one trading day or even one trading month, but is NEVER wrong in the long run. Long run has shown bad performance by NT. Why do you continue to ignore this and instead invent fantasy worlds where your NT stock holdings are still valuable? And why do you try to deceive others to join your fantasy realm? Have you no shame?
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        Truth is that the market does not lie! Market might be wrong during one trading day or even one trading month, but is NEVER wrong in the long run. Long run has shown bad performance by NT. Why do you continue to ignore this and instead invent fantasy worlds where your NT stock holdings are still valuable? And why do you try to deceive others to join your fantasy realm? Have you no shame?


        If you want to point out this notion that I am trying to deceive others,then I suggest that you look at bloggers who post from the other end of the spectrum,yourself included and point out the intent on magnifying some of their own negative perceptions on Nortel.

        For example yes4apple has written this piece concerning Nortel's pension obligation-


        " You forgot to mention about $3 bill of Pension Fund deficit which Nortel has to address right away or face the CH11!"


        yet after reading S&P's latest report on Nortel,analyst Ari Bensinger writes


        FINANCIAL TRENDS. While cash and cash equivalents stood at US$2.7 billion as of October 2008, the company
        is saddled with a long-term debt position of US$4.5 billion.We note, however, that no significant debt
        obligations are due until 2011, and that there are no specific maintenance covenants associated with the
        debt.We estimate negative cash flow of more than US$800 million during 2008


        For 2009, the company estimates that it will require roughly US$1 billion in working capital to run the business,
        absent the roughly US$500 million in cash in joint ventures and China, which is not easily accessible.
        We think the major uses of cash in 2009 will include cash restructuring obligations of roughly US$300 million,
        capital expenditures of approximately US$125 million, interest expense of US$270 million, and cash
        taxes of US$140 million. Moreover, we expect 2009 pension funding costs will top the US$250 million obligation
        that we forecast for 2008, given the declining asset performance of the fund during 2008.


        According to this S&P analyst,he just says that Nortel's pension obigations for 2009 will top those of 2008 which were estimated at $250 m,in addition to this he has not mentioned anything that would imply Nortel facing "CH11" if their pension obligations were not met,only that he expects 2009 contributions to be higher than 2008.

        As I have already mentioned if you want to point out bloggers like myself as being deceitful simply because I remain optimistic,then I suggest you point out the "deceptions" of others who paint the worst case scenarios the way yes4apple does.

        This is your chance to defend yourself,otherwise you will be seen as just another Nortel hater who turns a blind eye when it comes inaccurate info like that of yes4apple's insinuation of CH 11 if Nortel doesn't replace the pension shortfall imediately.
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        Psych, sales and earnings are not the same thing. Price to sales ratio is creative thinking, a la Enron style financial reporting.

        Please point out other examples of common stocks where price to sales is more relevant to valuation than price to earnings ratios.
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        You forgot to mention about $3 bill of Pension Fund deficit which Nortel has to address right away or face the CH11!
        How convenient of you to write more diversion posts just to fool new investors.
        Mike Z is not an idiot.
        I said so about Admiral but I say Mike is the smart kid, street smart.
        He gently apologized for misleading investors so we cannot call him a liar either.
        He will get his millions no matter what and I knew it when he got the job. Links available.
        in other words he would not search publicly for a buyer of MEN if he had another choice!
        He is desperate and the market knows it.
        Nortel corp is in the worst financial position ever!
        Customers are running away with new orders declining around $500 mill a quarter. There is no way Nortel can patch the hole!
        The ship is sinking and sinking fast!
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        Please yes4aapl, show us where the legislation is that states the pension deficit must be addressed right away.

        It was 5 years and then Canadian government has extended it for corporations. Worst case scenario, they could get a 0 interest loan from the government to cover any pending deficit obligations. The government will not let them go bankrupt...it would cost TOO MUCH!
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        Should have Sold in Feb 2004
        Did you get the links and info?
        or are you just hit and run away poster with Bullish recommendations for NT stock.
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        If you cannot read the article I can post some paragraphs for you
        Pension funds normally have to do a valuation of their obligations and assets every three years, and then plan sponsors have five years to fund shortfalls. However, once federally regulated funds are in a shortfall position, OSFI requires valuations to be done annually. (ANNUALLY)

        Cameron said about half the pension plans OSFI oversees were in a shortfall position prior to this year, so are doing valuations annually. That means a majority of Canada's federally regulated pension funds will be required to do a valuation report at Dec. 31 this year, giving companies no leeway to wait to see whether asset values recover over the next year or two.

        Another pension industry expert said the funding situation is especially exaggerated because pension funds are required to measure their obligations and assets on a "solvency" basis, which assumes a company is going to shut its doors immediately and must fund its pension now.
        • ^
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        It was posted here many times. Look for Duncan posts with the link for that.
        Any company with Pension Deficit has to address the problem each year!
        Your 5 years with extension is misleading!
        and as we know, the rules have not change yet!
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        P.S. LONG LIVE NORTEL!!! TIME FOR CISCO EMPIRE TO FALL.
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        Should have Sold in Feb 2004
        Did you say this?
        ============================
        I bought 500 shares today at $4.30 Cdn...unfortunately that dropped to $2.76 Cdn; so a loss of about $800 when I thought it had bottomed out. Now I have a total of 1920 shares with a cost average of about $13.25 or $1.32 pre-split. If they go under my total loss will be about $25K Cdn. I should have sold out in Feb 2004 when my 2200 pre-split were worth $10 Cdn and would have tripled my money in 3 years.

        Do you think I'm crazy people?
        ============
        re
        I think you have problems.
        $13.25 average PPS?
        What books about investing have you read?
        Don't you have friends or family to ask what to do?
        Let me tell you...
        even if NT recovers 25% you are just F.Uped!
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        Mark Sue is a moron .. he doesn't know what he's talking about.. actually another analyst looking to drop the stock to advise his "clients" to short the stock...
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        I suspect that Sue's target price was his best attempt at pleasing whoever ordered the analysis.
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        Having a target price of zero doesn't make sense in ANY case. As long as a company's operations are still active there is value associated with their stock. A stock can't go negative, so it is irrational to say that the expected value of this stock is zero.
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        More pumping from an "investor" who doesn't seem to know what investing actually is! Looks like you have been deceived sir!

        Take a look at GM balance sheet. Company equity is negative! So why is stock not zero? Maybe because some still believe gov't will bail them out.

        NT balance sheet also now has negative equity, which is thus reflected in the low share price and 0 target price of Mark Sue. Technically, NT is now "balance sheet insolvent!" And may soon be cash flow insolvent if deception is allowed to continue by people like you!
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        I am not an investor of this stock, and yes, I do understand how stocks work. The valuation of a stock is based on the return it will have to investors. Essentially it is an estimate of the scenarios that will play out in the future. Maybe it is unlikely that Nortel will ever be profitable again, however, it is not impossible. That alone means the stock should have a value higher then zero.

        Essentially it is the sum of (probability of event x) x (value of event x). The sum of this is not zero.

        I didn't say anything about the balance sheet of Nortel or its equity. My point was about the 'oppurtunity' that Nortel eventually becomes profitable. You mentioned a possible scenario yourself - government bailout.
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        Do you understand the fundamental definition of what a stock is? (If not, you're not alone. Most people don't, including many stock owners.)

        A stock doesn't have to go negative to reach zero. Noted by Duncan above, companies who have *negative* value are still active...even while in bankruptcy.
       
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