Tuesday, March 13, 2007

Calls of Note Part 1

Merrill Lynch commenting Nortel (NYSE:NT), saying that while the stock currently reflects a best-case recovery scenario, they are increasingly concerned that investors may be overlooking Nortel's weak product portfolio. Firm's proprietary quadrant analysis indicates that only ~14% of Nortel's product sales in 2006 came from growth markets where Nortel grew share. However, the overwhelming majority, or 44% of sales, came from declining segments, with the remaining 43% of sales from growth segments where Nortel lost share.

With Nortel exiting UMTS (~$650mn in '06 sales), and with firm's expectations for flattish CDMA trends, Nortel's remaining business has to grow at a challenging 10-15% pace in 2007 to meet Street expectations. Firm recently reduced their 2007 revenue growth estimate to only 0.7% YoY growth (vs. street at 3.5% growth) and believe there could be further downside to our estimates. Also, with >85% of Nortel's sales in markets where it is relatively weak, they are concerned 2008 could also be a challenging year, requiring either additional R&D expenses, potentially dilutive acquisitions, or expansion into low-margin services activities. Nortel has scheduled its 4Q06 earnings call for 19-Mar, and firm believes the stock could trade down if management sounds conservative on 2007 prospects.

Notablecalls: Merrill has valid concerns here. The Street is looking for healthy growth from Nortel, but to co is rather in the cost-cutting mode. Expect to see pressure on the shares today.

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