Thursday, September 13, 2007

Consider shorting Nortel (NYSE:NT) following warning from Alcatel-Lucent

Telecoms equipment maker Alcatel-Lucent (NYSE ADR:ALU) lost over a tenth of its stock market value after issuing its third outlook warning this year. Alcatel-Lucent said it had seen a change in capital spending among its wireless customers in North America, which meant it had not compensated for lower sales prices with higher volumes of sales.

Alcatel-Lucent now expected 2007 revenue growth to be flat to slightly up, at constant exchange rates. It previously forecast that revenue would grow around 5 percent at constant

Notablecalls: While it's not really a big surprise that US wireless capex is a bit shaky, I'm surprised by ALU's reaction of being down 10% on the news. In a way, it sends a message about the health (or the lack of it, rather) of the market. It may very well be that disappointments will not be greeted with buying anymore.

Which player may get hit following ALU news?

The first that comes to mind is of course Nortel Networks (NYSE:NT) with their exposure to US wireless capex. It is attempting to get margins up at a time when industry pricing pressures are intense and its positioning within the carrier space is becoming increasingly challenging. Competitors like Alcatel and Ericsson are eating its lunch. In Q2 the Carrier Networks business, driven by its dominant position in the mature CDMA market, delivered Nortel $173 million in profits on $1.06 billion in revenue. That's about 1/3 of overall revs.

Yet, looking at NT's chart, I don't see weakness coming as a surprise. With the stock trading less than 1x projected 2008 revs, the valuation isn't that high either. Plus, NT has already guided to a weak Q3.

So, all-in-all I do expect to see some weakness in NT in the n-t but nothing huge. Scalp short if you can get some decent fills early on.

Other players with exposure both to the US wireless capex & ALU include Powerwave (NASDAQ:PWAV) and Acme Packet (NASDAQ:APKT). I'm not making any calls on these, though.

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