From tonight's Globe and Mail - critical but fair article.
Ingram: Nortel investors enter a world of
pain
By MATHEW INGRAM
Globe and Mail Update
To paraphrase John Goodman's character
from The Big Lewbowski, Nortel investors
have just entered a world of pain. Their
beloved company — the pillar of everything
technological in Canada, the superstar of the
networking equipment sector, the big fish of
the Toronto Stock Exchange — has just fallen from its pedestal. Anyone
who bought shares a month ago has lost 35 per cent of their investment,
and those who got in last September have seen more than 75 per cent of
their stake obliterated.
More important than just the stock-market losses, however ($260-billion
and counting), is the loss of faith in Nortel's ability to continue its
remarkable growth — not to mention the loss of faith in the company's
ability to forecast. As everyone knows, stock prices rise and fall based
not on current performance but on future potential, and investors aren't
likely to trust Nortel's crystal ball gazing as much as they did a week or so
ago. How long will it take for that trust to return? Good question.
Just three weeks ago, Nortel reassured the market that its business still
looked strong — despite all the warnings from telecom equipment
companies such as Lucent Technologies and even Cisco Systems. The
company made a point of saying it still expected to increase its revenues
and earnings by 30 per cent this year, projecting a profit of 16 cents a
share in the first quarter and revenues of $8.3-billion. Now it says its
revenues will be $6.3-billion or so, and it will lose 4 cents a share for the
first quarter — and growth for 2001 will be more like 10 to 15 per cent.
The difference between those two forecasts is a massive, head-rattling
change for a business the size of Nortel to undergo in just three weeks —
the kind that should give a chief financial officer or a CEO whiplash. It's
certainly the kind of change that would make the most trusting investor
wonder what the hell is going on over at Nortel HQ.
How could the business have gone sour so quickly, for the company to
lose almost $2-billion in sales and 20 cents a share profit in three weeks?
Either the company doesn't know what is really going on in its industry —
which is hard to imagine, given the obvious warning signs over the past
months — or Nortel suffers from a massive case of hubris, believing it
could somehow win while everyone else was losing. In the West, this is
known as "drinking your own bathwater," and it is bad news.
If you're a retail investor who has a few bones to pick with John Roth
about his ability to manage his business, you'd better get in line. The
phones at Nortel probably started lighting up within moments of the
announcement about slower growth, and the list of aggrieved investors
and others is likely to be long. Up near the top would be JDS Uniphase,
which just a week ago took $2-billion in Nortel stock in return for a plant
in Zurich, Switzerland — those shares are now worth 35 per cent less.
Nortel's bombshell announcement about slower growth has also
torpedoed the share price of many other members of the telecom
equipment sector, stocks that just finished getting a boost from a bullish
report by optical equipment maker Ciena on Thursday. JDS Uniphase
tanked by more than 20 per cent on Friday, as did fibre-optic maker
Corning, which said its growth would be hurt by lower sales to a certain
customer — a customer analysts said was likely to be Nortel itself. Even
Ciena was down 8 per cent.
If you're wondering who comes out of all this looking pretty good, look
no farther than Sanford Bernstein analyst Paul Sagawa, the guy who was
jumped on by many of his fellow Nortel-watchers when he came out with
a negative report on the company and the entire sector in September,
when Nortel was at $66 (U.S.). He looked smart when Nortel
underperformed expectations in October, at which point the stock lost 25
per cent (and pushed the TSE down by over 800 points) and he looks
even smarter now.
The financial wizards at BCE Inc. also look pretty good, seeing as how
they locked in their profits on their remaining stake in Nortel when they
spun the company off as a separate entity a year ago. They "hedged" the
Nortel stake by striking a deal with a consortium of banks to guarantee
BCE $90 a share on Nortel, regardless of what happened to the stock
after the spinoff. In effect, the company has $2.8-billion more now than it
would have if it had not hedged that Nortel stake. Let's hope the banks
sold those shares short at some point, or they are now stuck holding the
bag.
As for the retail investors who believed Mr. Roth's repeated reassurances
that all was well at Nortel, they are now holding the bag as well, and they
aren't likely to cut the CEO much slack for the foreseeable future. Does
Nortel still have good prospects? Yes — it's still a leader in the optical
equipment game, and it will continue to grow (although at a much slower
rate). But investors are going to feel burned, and rightly so — and they
will be twice as reluctant to believe any future rosy forecasts.
E-mail Mathew Ingram
theglobeandmail.com |
