Analysts advise caution on Nortel

By Ronda Fears

Nashville, Tenn., August 28 - Nortel Networks Corp.'s warning that soft demand would hurt third quarter revenue and that it was slashing another 7,000 jobs to break even heightened concern about the telecom equipment group and prompted analysts to advise caution with regard to Nortel specifically.

"We've been pretty cautious on the networking group for a while," said Jeremy Howard, head of U.S. convertible research at Deutsche Bank Securities Inc.

"At the moment, there isn't any light at the end of the tunnel. There seems to be some complacency on the prospects of bankruptcy in this group. But, like with Lucent, although they have enough cash to last through the end of 2003, into 2004 it's going to get tough."

Nortel's securities were slammed, along with peers like Corning Inc. and Lucent Technology Inc. in the wake of the company's late Tuesday announcement.

The new Nortel 7% mandatory was quoted closing about 5 points lower at 23.15. The 4.25% due 2008 was quoted down 2.875 points to 40 bid, 42 asked. Nortel shares ended off 19c at $1.04.

Lucent's newest 7.75% convertible trust preferred due 2017 fell 6.375 to 47 bid, 47.75 asked and the 8% convertible trust preferred due 2031 dropped 3.625 points to 42.5 bid, 44 asked. Lucent shares ended down 22c to $1.67.

Corning's new 7% mandatory was quoted unchanged at 118.375 bid, 119.375 asked but the bonds were sharply lower. The 3.5% due 2008 lost 1.5 points to 55 bid, 56 asked and the 0% due 2015 dropped 0.625 point to 44.25 bid, 45 asked. Corning shares closed down 35c to $1.94.

"Although we do not envision a scenario whereby Nortel must return to the market before the end of 2003, we caution investors that Nortel must meet its targets to remain fully funded," according to a report Wednesday by convertible analysts Jeanine Oburchay and Brian Park at Wachovia Securities, Inc.

"As we noted in our July 19, 2003, morning note, we believe the company's business plan is currently funded, but the company could see continued top-line pressure."

Late Tuesday, Nortel announced third quarter revenue would be lower than previously expected due to lower capital spending by service providers, down 10% sequentially from $2.8 billion in the second quarter. Before, the company projected revenues to be up 10% sequentially.

Management still expects sequential bottom-line improvement in the third and fourth quarters and maintains its goal of reaching profitability by June 2003.

As such, management continues to restructure operations with the goal of lowering its break-even target to less than $2.6 billion from $3.2 billion previously. The company will lay off 7,000 additional employees to reach the target.

The company ended the second quarter with $4.86 billion in cash and equivalents.

Nortel cited further reductions in spending by service providers in the U.S., dashing hopes that the worst of the slump in telecom equipment spending was over.

In addition to its stock getting pounded, Nortel has seen its debt get knocked down into junk territory in recent weeks.

On Wednesday, in response to Nortel's latest announcement, Moody's put the Ba3 senior and B3 preferred ratings on review for possible further downgrade.

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