Last week I promised to look at Nortel (NYSE: NT). Nortel makes telecommunications equipment for every level of the market, from the individual consumer to businesses of all sizes to carriers. They compete with Lucent (NYSE: LU), Cisco (Nasdaq: CSCO), and Alcatel (NYSE: ALA).
Nortel is the #2 supplier of telecommunications equipment in the United States (Lucent is #1). To analyze this company, it's best to compare it with the competition. Looking quickly at Alcatel, we see that it posted negative revenue growth of 4.50% for the past five years, and revenues have declined 24.97% over the past year. Let's eliminate them; Nortel has had a 26.4% growth in revenue in the past year.
We could look at Cisco, but it's not a fair comparison either. Cisco is a supplier of network equipment, which is only one segment of Nortel's market. Cisco does not provide fiber optics, enterprise solutions, telephones, etc. So, we have whittled down the comparison companies to one: Lucent, which I wrote about last week.
The killer is this -- Lucent comes out on top of just about every financial item that I compare between these two companies. Let me give a few examples.
Gross Margin Nortel -- 46.02% Lucent -- 52.04% Net Profit Margin Nortel -- (0.77%) Lucent -- 8.92% Return on Equity Nortel -- N/A Lucent -- 21.1%
Nortel does beat out Lucent in 12-month revenue growth. Here are the numbers:
12 Month 36 Month 60 Month Nortel 26.4% 19.4% 19.6% Lucent 24.1% 27.0% N/A
Also, the issue of receivables rears its ugly head again. To compare the two companies, I calculated days sales outstanding for the past three years. To get this, use this formula: receivables/(sales/360). This formula tells you how many days on average it takes to collect on receivables. Here are the comparisons:
'99 '98 '97 Lucent 108 83 73 Nortel 110 112 114
As you can see, there is an upward trend in days sales outstanding for Lucent (not good), and while Nortel does not collect as fast as Lucent, it is showing a downward trend. Finally, there was the nasty earnings surprise in the last quarter -- Lucent reported $0.38, compared with $0.39 a year ago. Nortel reported $0.30 vs. a loss of $0.10 a year ago.
Are you thinking along the same lines as I am? Lucent certainly doesn't look bad, and it certainly beats out Nortel over the past few years. However, it looks like Nortel is quickly gaining on Lucent. Nortel's improvements in days sales outstanding, Nortel beating Lucent in revenue in the past year, and Nortel showing a much better earnings report last quarter indicate there may be a trend.
I did a quick search through the Web to see if we can explain the difference, and yes, I think I found it. It seems Lucent let Nortel take the lead in optical networking equipment, according to an article in CNET. This is a rather enticing subject: Is the light in the fiber actually at the end of the tunnel for Nortel? Is Lucent in the dark? Let's explore that next week.
My wife, who is really my chief editor, read the draft of this column and said, "How can you not talk about Friday?" I'm sorry -- I had a nice conversation with my ex-boss on Friday. Oh, she means I should comment on the stock market. Well, everybody else has, so I may as well too. Historically, the market has always had down periods. We know it will happen, we just don't know when it will happen, how bad it will be, or how long it will last. That's why you don't keep money in the market that you need short-term. It also presents us as Drip investors with a buying opportunity, and lets our dollar cost averaging go to work for us. That's all I have to say on this. I hope you all have a good week.