Nortel Rings Up a Double (from article MF , Daily Double 7/3)
By Paul Larson
How Did It Double?
Recently there have been two pistol-hot industries on Wall Street. One is the fiber optic networking industry, where companies such as Newport (Nasdaq: NEWP - news), JDS Uniphase (Nasdaq: JDSU - news), Corning (NYSE: GLW - news), and Tollgrade (Nasdaq: TLGD - news) all have done extremely well over the past year and have been highlighted in this space. The other sector seeing keen investor interest in recent weeks is the wireless industry. Today's Daily Double, Nortel Networks, is a major player in both fields.
Beyond being in some of the hottest sectors around, Nortel has also shown some impressive growth over the past few years. In 1999, the company was able to grow its sales some 26.3%, which is no small feat considering that Nortel has annual topline revenue of more than $20 billion. Sales growth in the first quarter was also up an impressive 48% over the same quarter last year.
In addition, the company has been able to grow its bottom line nicely, after backing out several one-time expenses related to its numerous acquisitions. Adjusting for these special charges, Nortel was able to earn just under $800 million last quarter, a new all-time record for the company.
The rest of 2000 also looks quite good, with the company guiding investors to expect sales growth near 30-35% for the balance of the year. Earnings from operations are also expected to be up by a similar percentage.
Supplying some extremely high-growth sectors, the positive outlook for the coming year, and some proof in the company's financial statements that the growth is for real, it is little wonder that Nortel's stock has done well. A little over a year ago, the stock was trading under $20 per share. Today, it's trading at more than triple that level, and the company has been able to add almost $150 billion to its market capitalization.
Business Description
Formerly known as Northern Telecom, Nortel Networks is one of the world's largest networking hardware companies. Nortel makes a wide variety of equipment for the telecommunications, Internet, and wireless industries. Based in Ontario, Canada, the company has operations around the globe and more than 70,000 employees worldwide. Some of Nortel's peers include Cisco Systems (Nasdaq: CSCO - news) and Lucent Technologies (NYSE: LU - news).
Nortel recently started filing earnings statements using U.S. Generally Accepted Accounting Principles (GAAP). It also split its stock 2-for-1 in early May in conjunction with one of Nortel's largest shareholders, Canadian carrier BCE (NYSE: BCE - news), spinning off its Nortel stake to its shareholders.
Financial Facts
Income Statement
12-month sales: $23,320 million
12-month income: ($895 million)
12-month EPS: ($0.64)
Profit Margin: N/A
Market Cap: $202,473.2 million
Balance Sheet
Cash: $2,060 million
Current Assets: $14,203 million
Current Liabilities: $7,524 million
Long-term Debt: $1,484 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 8.7
How Could You Have Found This Double?
Beyond benefiting from the overall growth of the networking industry, it has been clear for some time that Nortel was positioning itself to grow a bit faster than the industry as a whole. This is due to focusing its energies in some extremely promising sectors -- optical networking, wireless Internet, and broadband, to name a few -- as well as making acquisitions in these sectors to beef up its product and technology portfolio.
Moreover, Nortel is a perfect example of how doing some extra homework can really pay off for investors. Figuring out what was really going on at the company financially would have taken a bit of extra work. Not only was there the minor chore of translating from Canadian dollars and accounting principles to U.S. ones, but Nortel's numerous acquisitions muddied the profitability and cash flow picture.
While goodwill charges and other miscellaneous acquisition expenses shouldn't be ignored, they are accounting for the past, not the future. It is often a good idea to look beyond these non-cash expenses to get an idea of the true ongoing cash-generating ability of a company.
Where to From Here?
Investors already have a fairly good idea what Nortel will report financially for the rest of the year. If the company achieves its 30% guidance for both topline growth and operating earnings, that means the company is on track to have revenue and operating profits of roughly $28 billion and $3 billion, respectively. That's quite impressive growth given Nortel's size, but it also means the stock is trading at approximately 7x times forward sales and 70x operating earnings -- not outlandish for a high-quality company, but not cheap either.
Fool analyst Phil Weiss recently put Nortel thr ough the Rule Maker portfolio criteria. His conclusion? Nortel had a lot going for it, but it wasn't quite a dominating Rule Maker just yet.
Though the company does appear to fall short of a few of the Rule Maker benchmarks, Nortel is still a quality operation that appears to have several years of healthy growth ahead of it. For investors interested in the networking hardware industry, Nortel has to make the short list of large companies to consider.
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