Nortel Networks - a history of failure.

Today's [Monday, August 4, 2008] LEX column in the Financial TImes recommended that investors get their feet wet w.r.t NT. I respect the Lex authors a great deal, and their analysis is always based on thorough and excellent research, and often have insights that baffle me, and has me nodding in agreement. But this time around, I disagree.

Back in the 90's NT was called Northern Telecom, and they were a dividend paying, boring company, that did well for a lot of Canadian retirees. In 1998, they acquired Bay Networks [Bay Networks was then the newly merged WellFleet/SynOptics] for $9Billion in NT stock, and re-christened themselves Nortel Networks. As the stock was bid through the roof, the dividend was no big deal, and represented a very minute % of the stock's quotation. Y2K was great for NT. Their sales topped $30 Billion, with healthy gross and net margins, and their market value hit a high of almost $400 Billion [CDN].



Then came a disappointing series of events. The average selling prices of NT's equipment dropped, the massive dark and lit fiber build-out ceased, and NT started losing money. NT tried to save money by killing the dividend in 2001. But things got from bad to worse, and CEO John Roth was asked to decide to spend more time with his family and the CFO Frank Dunn succeeded Roth. Things got from bad to worse and before long, Dunn was done too [sorry - bad pun]. Anyway, about $3 billion in revenues from 1998 to 2000 was moved to 2001, 2002 and 2003 and about a quarter billion vaporized. Apart from SEC lawsuits/investigations and restatement of numbers, Dunn & Co. were charged by the RCMP recently.

Anyway, from Roth through Dunn, NT's management did not deliver. They took a $19Billion write-down in assets [mostly goodwill from acquisitions] in 2001, and warned that they would restate earnings. The stock followed south from a high in the $800's [split adjusted] to about $20, when the company did a 1 for 10 reverse split [the $800 would be $80 and $20 would be $2 without the 1 for 10 reverse in Dec 2006].

In 2004, a new clean-up CEO Mike Zafirowski took the helm from Dunn. He sold non-core assets, and has done his best to keep the divisions in synch.

Looking at NT's current 10Q - for the quarter ending June 30, 2008, they have $2.8 Billion in deferred taxes as an asset. Looking back from 2007 to 2008, NT had $2.868 Billion in deferred taxes in 2007. On June 30, 2008, the deferred tax number is $2.809 Billion. Which means that they used $59 Million. At this rate, it will take NT 46 years to "use" this asset. So, I am going out on a limb and saying that this asset is worthless.

The bottom-line:
1. I [in a rare act of dissent] - disagree with Lex.
2. NT is not a good investment at any price - given their record of not being able to do what they promise to do.
3. Strange items on the 10Q like the deferred tax assets which will take 46 years to use [I am not an accountant, so I expect to be corrected regarding the "use" of this asset].
4. NT possesses no real competitive advantage in the Telecom Equipment space.
5. In my opinion, no stock is worth buying just because it is cheap. It needs to be cheap and have a viable business with good numbers [like good cash flow, FCF] for me to buy into the stock.

Disclosures: I have no position[s] in NT - nor do I plan to initiate any.