RBC Analyst Cuts Nortel's Stock to $0!

by: FP Trading Desk November 13, 2008 | about stocks: NT    

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It’s not often that you see an analyst cut their price target on a stock to zero. But when a company looks like it may face bankruptcy, you can see why it may be a sensible choice. The analyst is Mark Sue with RBC Capital Markets. The company? You guessed it, Nortel Networks Corp. (NT).

It has $2.65-billion in cash but is overwhelmed by a hefty cash burn rate and debt. The macro environment is getting worse, Nortel has a challenging industry position, and it faces liquidity concerns when the capital markets are essentially closed, Mr. Sue told clients. As a result, he thinks bankruptcy is a distinct possibility down the road.

The analyst said:

The world moved on while Nortel was stuck in restructuring mode, and the lack of financial flexibility means Nortel has to rely on asset sales to fund future operations.

Without government intervention or a major financial sponsor stepping up, Nortel may run out of cash before its $1-billion 2011 bonds mature, Mr. Sue said. He noted that Nortel began 2008 with $3.2-billion in cash but has had negative free cash flow of $607-million year-to-date. If it goes through $250-million in the fourth quarter, it will finish the year with $2.4-billion in cash.

But next year, if Nortel burns through $800-million in cash, as the RBC analysts says it could, that brings its cash closer to $1.6-billion. Since it needs $1-billion to run its business and $500-million for Chinese joint ventures, the money supply starts to look pretty thin.

Since common equity holders are last in line, Mr. Sue said his price target falls to nil from $1.50. His rating: underperform. The analyst added that Nortel’s distressed situation means potential bidders for its Metro Ethernet assets may offer distressed prices. As a result, Nortel could decide to sell its CDMA assets as well. But Mr. Sue is not sure if Nortel call sell more than half of the company without triggering its asset sale debt covenants.

And if it needed another problem, Nortel’s already underfunded pension ($1.1-billion at the end of last year) may have more than $500-million in liabilities tied to Metro Ethernet. But with roughly 53% of the $8.1-billion plan invested in equities and assuming a decline of 40%, Mr. Sue noted that the deficit may swell to $2.8-billion.

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This article has 1 comment:

  •  
    Nov 14 10:48 AM
    Good article...........I have some leftover shares of NORTERl when it ws up in the stratosphere price of C$ 130???

    Maybe I will keep them and frame them--as a souvenir of a "Great Canadian" internet company run by incompetents!
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