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Technology Stocks : Nortel Networks (NT) -- Ignore unavailable to you. Want to Upgrade?

To: Kenneth E. Phillipps who wrote (7842)	10/28/2000 12:27:01 PM
From: Dale Stempson	Read Replies (1) \| Respond to of 14638

Josephthal & Co. Buy Rating - $85 Price Target A friend pointed out to me that this report was posted over on the Yahoo! Nortel thread. I of course cannot verify its accuracy or authenticity. _____________________________________________________________ Links: messages.yahoo.com messages.yahoo.com _____________________________________________________________ Market Over Reaction by: HowardSmart (M/CA), 10/27/00 10:40 pm, Msg: 65603 of 65725 Josephthal & Co. Price 52-Week EPS (FY: 12/31) FY P/E 10/26/00 Price Range FY99A FY00E FY01E FY00E FY01E $45 3/8 $89-$27 13/16 $0.51 $0.75 $0.99 60.5x 45.8x Quarterly EPS Mar Jun Sep Dec 2001E: $0.17 $0.24 $0.23 $0.34 2000E: $0.12A $0.18A $0.18A $0.27 1999A: $0.07A $0.11A $0.11A $0.21A Dividend:$0.075 DJIA: 10380 Shares Outstanding:3.2 billion Yield:0.2% S&P 500:1364 Market Capitalization:$145.2 billion _____________________________________________________________ NT: Reiterate Buy Rating - $85 Price Target * We believe that the market over-reacted to Nortel's third-quarter earnings report. * The company's optical sales performance in the September quarter was affected by the ordering patterns by a handful of customers. * Nortel's 42% year-over-year revenue gain and 64% increase in EPS in the September quarter still remain impressive. * The company is gaining market share versus its largest competitor, Lucent, and we do not expect that trend to change for several quarters. * The revised revenue and guidance by JDS Uniphase indicates that the overall optical market remains highly robust. We are reiterating our Buy rating on the shares of Nortel Networks. Our 12-month price target remains unchanged at $85. On October 25, Nortel's share price pulled back due to concerns regarding the company's sales growth in fiber optic optical equipment. A detailed analysis of Nortel's actual results, combined with comments by JDS Uniphase (JDSU-$74 7/16-NR,#), the largest independent supplier of optical components, suggests that investor concerns were overblown. JDS Uniphase not only reported sales and earnings for the September quarter that exceeded analyst expectations, but the company also raised guidance for fiscal 2001. Full-year 2001 revenue growth guidance was increased to a range of 115% to 120% from 90%, and earnings per share guidance was increased to $0.80 from $0.70. After surveying its OEM customers and carriers, JDS arrived at the following conclusions: * The company does not see any indications of systematic component or module increases in customer inventory. * JDS has not seen double billings. * The company has not seen any change in the size of its orders, nor any order stretch-outs. * Despite its efforts, JDS has not been able to reduce lead times on key components. Furthermore, Nortel remained a greater than 10% customer during the September quarter, and sales to Nortel grew faster than JDS's company-wide growth rate. How then does one reconcile JDS Uniphase's findings with the sequential sales decline reported by Nortel and Nortel's comments that component demand and supply are now in balance? We believe that Nortel's sequential sales decline was a function of accelerated purchases by a handful of its customers in the June quarter. Because Nortel had been having problems keeping up with demand for optical systems in the early part of the year, these customers had ordered equipment in advance of their installation requirements. These customers then proceeded to "work off" the inventory in the September quarter, as Nortel's manufacturing began to catch up with demand. At the end of September, lead times for large capacity optical systems from Nortel were eight weeks, and for metro systems were two to six weeks. Nortel remains the largest supplier of optical systems. In addition, its year-over-year growth rate in the September quarter of close to 90% was probably well in excess of the industry average. For 2000 in total, we expect that the company's optical systems revenue will be up 125% to 135%, and in 2001, should be up at least 50%. A confirmation that fiber optic demand remains strong has been provided by Lucent (LU-$21 1/16-Hold). Lucent is the second-largest supplier of fiber. While Lucent faces several challenges, its sales of optical fiber were up 61% on a year-over-year basis, and our checks indicate that fiber remains in tight supply. From a broader perspective, Nortel's results in the September quarter were strong. Revenues increased 42% year over year, while earnings per share increased by 64%. For a company that is expected to generate close to $30 billion in revenues this year, it is difficult to characterize this as a disappointing performance. Furthermore, Nortel is gaining share on an almost across the-board basis with its major competitor, Lucent. At some point, Lucent will appoint a new CEO, and begin a recovery process. In the interim, Nortel is well positioned to benefit. Nortel's optical growth of close to 90% compared with a 26% year-over-year decline at Lucent. In switching, Nortel's revenues grew by more than 25%, while Lucent's declined by 13%. In wireless infrastructure, Nortel's sales rose by more than 50% versus Lucent's 3%. Nortel's gross margin rose during the quarter to 44.0% from 42.3% last year, while Lucent's declined to 39.2%, from 45.4%. Nortel's improving margins should permit it to fund higher levels of R&D than Lucent, thereby allowing it to increase its lead over its closest competitor. _____________________________________________________________ Regards - Dale