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To: Andrew who wrote (48725)	3/28/2001 2:23:31 AM
From: Andrew	Read Replies (1) of 62347

12-15 $CAN written all over this stock. MARKET UNDERPERFORM Nortel Networks (NT : TSE : $26.30 / NT : NYSE : US$16.76 : Issued 3.1B f.d.) HIGHLIGHTS * Nortel warns again and continues to disappoint. Still an UNDERWEIGHT Recommendation: MARKET UNDERPERFORM 12-month target price: $19.09 52-week range: $124.50-23.61 Shares O/S: f.d. 3.1B Dividend: $0.117 Yield: $0.44 Weekly trading vol.: 75.2M Market capitalization: $81.5B Sector: Industrial Products Web site address: www.nortelnetworks.com Introduction Nortel again warned investors with an announcement after the market close on March 27, in which management changed its previous guidance for Q1 EPS before goodwill amortization of a loss of $0.04 per share to a loss of $0.10-0.12 per share. Full-year guidance had previously on February 15) been for a 15% gain in revenues and a 10% gain in EPS before goodwill amortization. Now NT is declining to offer any guidance for full-year 2001 EPS. NT stock was trading in after-hours at US$14.60 or about C$22.63. Comment NT has disappointed investors in a serious way for the third time in five months. As recently as February 15, the company restated its guidance for Q1 and now is predicting a more significant loss for that quarter while now making no projections for full year EPS. For this, we believe the company's shares will continue to remain in the penalty box for some time. Valuation As the statistics box indicates above, we continue to recommend the stock as a MARKET UNDERPERFORM but have maintained the 12-month target of C$19.09, which we used in our recent March 2001 Portfolio Strategy report. We now arrive at this target by using a P/E multiple of 24.6 times on our new blended 2001/2002 EPS estimate of US$0.49 - down from our previous estimate of US$0.65. It should be recognized that with no earnings guidance from management for the balance of this year, our EPS estimates at this stage are very tentative. We have calculated the 24.6 projected P/E multiple by taking a 1.2 PEG ratio (this compares to the 11-year average of 1.1 times) and applying it to a new downwards revised three-year EPS growth rate of just over 20%. The EPS growth rate assumes a decline of 46% this year, a recovery of 88% in 2002, and a gain of 20% in 2003. Clearly, our target is still below March 27 after-hours trading levels of around C$22.63. The corollary is that we would need to see a price reasonably below that level to justify buying it. As advised in the previous Strategy Note on February 16, our NT position was sold out of our Model Portfolio at that time (at $30.70). This left our Model Portfolio at a zero weighting in the technology sector (we also sold ATI Technologies in January). We do think that the Technology sector will likely sustain its short-term rally over the next few weeks. However, those stocks that peaked latest or held up longer (such as the Nortels and Celesticas) will be the last to join the short-term party. Nevertheless, we continue to be comforted that the Model Portfolio continues to perform relatively well. As at the March 27 close, it is showing a year-to-date marginal loss of 0.6% compared to a year-to-date loss of 12.9% for the TSE 300 Total Return Index.

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