Nortel bets on future gear

Telecom equipment maker’s Q2 revenue numbers out Friday as fraud trial of former CEO, lagging markets loom.

The roller coaster ride that has been Nortel Networks’ (TSX: NT) stock price throughout the first half of 2008 could continue into the second half, according to one company watcher.

The Toronto-based telecom equipment provider announces its second-quarter results Friday, with consensus estimates calling for a loss of US4 cents per share.

The tumultuous stock ride, which saw the price weave between a high of $15.02 on January 2 to a low of $5.85 on March 17 and up slightly to $7.73 as of Thursday, could continue due to a number of factors, says Carmi Levy, a telecom analyst with AR Communications in Thornhill, Ont.

One is the looming fraud trial of three former high-ranking Nortel executives, including ex-CEO Frank Dunn, accused of cooking the Nortel books during 2002 and 2003. A hearing is set for August 18.

Although Levy noted that the market recognizes the events that brought about the trial are part of Nortel’s past, he added that it’s quite possible testimony coming out of the trial may paint Nortel in “an even worse light than it has been painted thus far.”

That could, in turn, easily affect the firm’s stock.

“Investors don’t often take a lot of time to make decisions, especially in today’s era of programmed and electronic trades. All it takes is a trigger of a rumour and before you know it, the stock is going one way or another.”

Another major factor affecting Nortel and its stock price is the company’s current “precarious balancing act” between a waning market for the older equipment that the company built its business on and its efforts to develop next-generation gear.

“Nortel’s core business is in rapid decline,” Levy said. “They have been a leading supplier of [code division multiple access] wireless gear to carriers. [U.S. telecom giant] Verizon is pulling back on their investment in that and that directly affects Nortel because Verizon is their largest customer.”

Nortel’s strong focus on developing equipment for the more advanced networks of the future has been encouraging, Levy added. This includes its work around gear that can move Internet traffic at speeds of up to 40GB per second.

“They’re showing a willingness to be a leader and not a follower,” Levy said. “Fundamentally, they’ve been doing an excellent job of trying to rebuild and to build a foundation for the future.”

Nortel added a feather to its cap in July when it was chosen to supply the networking infrastructure for the 2012 London Olympics.

Scotiabank (TSX: BNS)Equity Research is calling for a rosier result in Friday’s earnings announcement than consensus, with expectations of a 2 cent-per-share gain.

“We expect revenue in the second half to be up only very slightly to the second half of last year as declining mobile revenue is offset by improving performance in [the] optical and enterprise [segments],” Scotiabank economists wrote in a note to clients.