Despite changes at top, Nortel rides high

Despite news of the departure of the company's No. 2 executive this week, Nortel Networks continues to ride a wave of confidence from investors on Wall Street.

3 min read
Despite news of the departure of the company's No. 2 executive this week, Nortel Networks continues to ride a wave of confidence from investors on Wall Street.

Nortel's stock has been on a steady climb since last fall and is on track to end the week at a new high, despite news that president David House, the former chief of what was Bay Networks, will soon leave the company.

Though Nortel's market valuation still falls shy of competitors such as Lucent Technologies and Cisco Systems, a number of new customer deals and the introduction of its new voice technologies for the Net has given Wall Street a reason to be optimistic about the firm's future.

Nortel has seen its shares rise from the high 20s in October to the high 80s today. This is proof, analysts say, that the company--which operates in the hotly contested equipment market for data, voice, and wireless networks--had been undervalued following its acquisition of Bay Networks.

In comparison, others in the networking sector such as Lucent and Cisco have been trading in a short range recently, while erstwhile entrants such as Newbridge Networks and 3Com have been fraught with financial woes.

Cabletron Systems received a boost recently on news of an executive change and rumors that it may spin off some of its more successful businesses. Of the larger networking companies, only phone equipment maker Tellabs and Internet player Ascend Communications have been on a share-price run similar to Nortel's.

"Certainly Nortel doesn't have the growth rate of a Cisco, but we will say their growth rate remains pretty impressive," said equities analyst Michael Davies of Punk Ziegel. "Nortel could still have some upside."

In an interview with CNET News.com, House said now that Bay has been integrated into Nortel at a technology level, the remaining tasks revolve around the combined firm's promotional efforts.

"The reason the company lags its competitors right now is marketing," House said.

The executive said many of Bay's programs have survived the merger, helping Nortel evolve from its slow-paced telecom heritage into a more formidable competitor in the networking space.

"A lot of the Bay methods have been the ones that survived," House said. "I'm not going to tell you that Northern Telecom is a Silicon Valley company today--I think the company has really tried to match its culture to its customers."

And it appears Nortel is winning over customers, based on recent deals for infrastructure equipment with the likes of AT&T, Sprint, and the Spanish subsidiary of British Telecom, among others. "They're voting with their dollars," House said.

Anticipating a recovery in Nortel's wireless business after weakness in the second half of 1998, investment bank PaineWebber recently upped its 12-month price target for the company from $90 per share to $106, and increased its earnings expectations for the firm's fiscal 1999 by 2 cents.

PaineWebber noted that Nortel has been trading at a discount to comparative firms like Lucent due to "execution risk." The investment bank said the company's stock should close the gap if it continues to show growth improvement in its businesses.

TD Securities, a Canadian investment bank, also upped its estimates for Nortel from $90 per share to $104. Pointing to the recent British Telecom deal, the firm noted that "these announcements are evidence of a significant change in carrier perception of Nortel."

House's future
Separately, House said it is unclear what he will do following his departure from Nortel, but he would not comment on his potential interest in the openings at systems giants Compaq Computer and Hewlett-Packard.

"There's always a lot of good jobs out there--right now there's more than normal," said House. "There's a tremendous demand for proven executives.

"That's a decision process I'll have to go through," House added. "Clearly, I have a skill set to run a large company. The question is: What do I want to do?"