Another year, another stomach-churning roller-coaster ride for Nortel investors to endure. Just when it looked like the beleaguered communications equipment giant was getting its act together under CEO Mike Zafirovski, his new-look executive team and their new plan to radically overhaul the business, the old jinx returned. From a 52-week low of $21.40 in mid-August, and then another dip as low as $21.80 on Nov. 9 (adjusted for a 10-to-1 stock consolidation on Dec. 1, 2006), the stock did manage to climb as high as $37.35 on Feb. 19. Since then, though, the shares have retracted more than 25%.
It hasn't helped matters that one of CFO Peter Currie's final acts before he officially resigned April 30 was to delay filing Nortel's fourth-quarter financials by more than two weeks in March (when reported, they were underwhelming) and announce yet another restatement the fourth in four years. As the market digested this troubling news, the U.S. Securities and Exchange Commission laid fraud charges against four former top Nortel executives, including ex-CEO Frank Dunn.
The company's future prospects in a consolidating industry with larger competitors such as Ericsson, Cisco Systems and Alcatel-Lucent weigh heavy on the stock. The market may be realizing just how hard it will be for Nortel to grind out its goal of expanding its operating margins by US$1.5 billion before the end of 2008, while at the same time battling fierce headwinds to grow revenues. In early May, it reiterated its guidance for 2007: flat to slightly lower revenue as it tries to fill the US$660-million hole left from divesting its UMTS Access business at the end of last year, gross margins between 41% and 44% of revenues, and operating margins at 5% or higher of revenues. Should Zafirovski achieve these steady improvements without surprises, it would be a uniquely Nortelian triumph.
One potential distraction: acquisitions. The company now has US$4.55 billion in cash. And with Nortel, investors have learned to expect the unexpected.