Sagawa appears to be bullish as he claims that NT is a full year ahead of LU in Optics............bottom of this article is where he is quoted.
The run-up in Nortel's stock price has put it at excessive multiples and raised questions about how much higher it could go. While the BCE spinout of its Nortel shares may put a temporary damper on the stock, Nortel is fundamentally strong. The company has a solid technological lead of several months over Lucent, and this is likely to produce several quarters of strong financial performance and increasing attention from US analysts and investors, thus providing a second wind to move higher still.
Toronto, ONT, February 15 /SHfn/ -- Canadian tech heavyweight Nortel Networks [T.NT], [NT] has been on an upwards tear since January's technology sector dip. Part of the reason has been disappointing first quarter results for rival Lucent Technologies [LU] versus Nortel's strong performance.
Nortel should continue to outpace Lucent through the next quarter, if not longer. Nortel's fiber optic expansion and hiring announcement of February 14th is the company's second such major expansion within the past five months, and a positive indication of success in competing against Lucent.
On recent stock movement, Nortel has certainly outpaced its rival. As little as one year ago, Nortel was trading at a market cap to sales ratio, as well as earnings multiple, far below those of its competitor. Now the situation has reversed, with Nortel overtaking Lucent's market capitalization for the first time ever on February 9th.
"The BCE spinout of its Nortel shares and upcoming Nortel stock split could allow for a needed breather in upward momentum by increasing the supply of shares on the market."
Nortel's run up has put it at excessive multiples. At February 9th P/E was 114.5, and the price/earnings/growth (PEG) ratio was 8.06 versus 2.26 for the S&P 500. But the stock may have legs to run further still. The huge optical equipment demand that is behind Nortel's present boom is not forecast to let up, and the BCE [T.BCE] [BCE] spinout of its Nortel shares and upcoming Nortel stock split could allow for a needed breather in upward momentum by increasing the supply of shares on the market.
Both Lucent and Nortel, however, are facing the same overall excess demand in the fiber optics equipment market. With Lucent's stock price presenting better fundamental value, Nortel needs to maintain very strong financial performance and catch a "second wind" to keep its stock moving the right way.
The second wind for Nortel may come out of the States. American business press coverage of New Jersey-based Lucent, one of the most widely held stocks in the US, is comprehensive. Coverage of Nortel is thin. The Canadian market may know and love Nortel, but US investor psychology is a far more powerful moving force for stock prices.
If Nortel continues to outperform, at Lucent's expense, US business news coverage of Nortel will increase. Increased awareness of Nortel could be the next step in a possible US investor psychology switch from Lucent to Nortel.
The first step in such a switch has already seen some momentum. Even though Lucent's stock tanked after its first quarter disappointment, the majority of US analysts remained positive, basing maintenance of buy recommendations on strong demand for Lucent's fiber-optic equipment. The standard line was that Lucent could not satisfy excess demand due to "short-term manufacturing constraints."
At the same time, US analysts became more positive on Nortel, moving to 17 of 31 firms having some variation of a "strong buy" rating from 12. Future performance could enhance US analysts' positive tilting on Nortel.
Better US news coverage, combined with favorably tilting analyst coverage, might begin opening the door to larger American demand for Nortel stock - giving it the legs to continue moving upwards. For this to happen however, Nortel will have to continue outperforming Lucent. This is possible.
The real explanation for Lucent's first quarter problem is that its lagging technology caused it to have less demand than Nortel, even though the overall fiber-optics equipment market remains booming. Such a situation will probably continue into the second half of calendar 2000, and presents a great window of opportunity for Nortel. "We believe Nortel has a huge Q1 and Q2 in front of it," said John Wilson, analyst at Bunting Warburg Dillon Read in Toronto.
Nortel's great opportunity and Lucent's problem stems from R&D decisions made in the early 1990's. At the time, there were two R&D approaches to increasing the flow rate, or capacity, of fiber-optics systems. One was higher speed - the higher the speed (measured in bits per second), the higher the flow rate. The other was dense-wavelength division multiplexing (D-WDM), a technology for splitting light into color channels - the more channels, the higher the flow rate. Nortel chose to focus its commercialization efforts on higher speed; Lucent chose to focus on D-WDM.
"Nortel's 10-gigabit equipment dominates the big system market winning at least 75% of all contracts. Lucent expected customers to keep on ordering its 2.5-gigabit offering until it could deliver better. The expectation was wrong."
Lucent expected customers to keep on ordering its 2.5-gigabit offering until it could deliver better. The expectation was wrong.
The Q1'00 revenues shortfall at Lucent was directly related to its D-WDM decision. In their current state of rapid technological evolution, big long-haul continental or nationwide telecom systems have virtually standardized on 10-gigabit (OC-192) core equipment. Nortel's 10-gigabit equipment dominates the big system market winning at least 75% of all contracts. Lucent has plenty of D-WDM equipment but does not have a deliverable 10-gigabit product.
Lucent expected customers to keep on ordering its 2.5-gigabit offering until it could deliver better. The expectation was wrong.
"We have all our tests done and are ready to ramp up for full production [of product to compete with Nortel]," said Kathy Szelag, director of optical networking strategy at Lucent. But the product roll out schedule still leaves a 3+ month empty gap for Nortel to continue filling. "Lucent does not have it and Nortel does," said Mark Lucey, analyst at TD Securities.
Going forward, Nortel's window of opportunity may last longer than the next three months. Nortel has virtually caught Lucent in market ready D-WDM technology. The newest Lucent equipment in production ramp up pumps 80 light channels; Nortel is now capable of pumping 160 channels, at higher speed than Lucent, with near-term commercial availability. This is important because the explosion in bandwidth demand has created a parallel explosion in demand for higher and higher flow rate.
Nortel CEO John Roth asks a rhetorical question: "How do you feed the big optical [fiber] pipes?" His answer is that demand for bandwidth means you have to use the highest capacity, highest flow rate equipment you can buy - which means buying from Nortel, not Lucent.
"Nortel has a nine to twelve month lead," said Paul Sagawa, analyst at Sanford C. Bernstein & Co.
CEO Roth wants to keep this lead. If he does, Nortel shareholders will be thanking him. |
