Wall Street securities firms aren’t the only bearers of bad news these days. On Sept. 17 telecom equipment maker Nortel (NT) trimmed growth forecasts and said it’s likely to announce cost-cutting measures such as staff reductions.
Most troubling for investors who pummeled Nortel stock, slicing 47% off its market value, was the announcement that Nortel may sell one of its fastest-growing businesses. Nortel CEO Mike Zafirovski said he may flog the Metro Ethernet division, which makes gear that delivers broadband within cities. The business accounts for about 14% of Nortel’s total sales, and is “one of the faster-growing [market] segments,” registering a 10% compound annual growth rate, Mark Sue, managing director at RBC Capital Markets, wrote in a Sept. 17 research note.
Analysts viewed the potential sale of one of Nortel’s growth engines as a harbinger of more sales; some said it may even presage a complete dissolution of the company. “The fact that they are weighing the sale is giving the impression of a lot more trouble,” says Richard Windsor, an analyst at Nomura Securities.
A Widening Loss
Nortel is struggling amid an economic slowdown that’s causing customers to delay telecom equipment purchases. The company is also losing share to rivals such as Huawei that can sell products at a lower price. Other telecom equipment makers including Alcatel-Lucent (ALU) face similar challenges [BusinessWeek.com, 9/2/08], but Nortel appears less well-equipped to manage them, says Stephane Teral, an analyst at consultancy Infonetics Research. “Nortel is the weakest of all these [large] players,” he says. Nortel’s second-quarter loss widened to $113 million from $37 million a year earlier.
Investors and analysts are concerned that a multiyear effort to stem losses and revive growth isn’t paying off. Some are beginning to wonder whether Zafirovski may conclude the company is better off sold in pieces. “Nortel has entered a…