Nortel Networks at a High Premium

Nortel Networks Corporation - ADS (NT) is a leading developer of telecom equipments. We maintain our Hold rating with a higher valuation target for Nortel as we expect a series of customized products designed for IP-based converged networks from the company over the near term.

The company has taken a strategic decision to revamp next-generation (4G) wireless offerings in order to introduce WiMax and LTE solutions faster to the market, in some cases ahead of its competitors. Telecom gear manufacturers are likely to be challenged by tightened capital budget of carriers due to ongoing recessionary conditions in the global economy. It was necessary for management to appropriately plan its product roadmap to focus more on growth markets.

We believe this new business strategy will solidify Nortel’s position in the wireless equipment market. Furthermore, the company received a major contract for its high-speed Metro Ethernet switch from Verizon (VZ - Analyst Report).

Nortel is currently trading at 61.3x our fiscal 2008 earnings estimates. This represents a significant premium to both the forward S&P 500 average and the peer group average. In the near-term, we believe the stock price will remain volatile with the possibility of an economic recession in the U.S adding to the near-term risk factors. Therefore, we set a six-month valuation target of $12, which is based on a Price/Sales ratio of 0.53x our fiscal 2008 sales estimates.

Nalak Das contributed to this report.

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Read the full analyst report on NT

Read the full analyst report on VZ