Just Say No to Nortel By Adam Lashinsky Silicon Valley Columnist 7/19/01 7:23 AM ET

One could argue that it's time to buy Nortel (NT:NYSE - news - commentary) because the stock, at $7.58, is 91% below its 52-week high. But that would be a mistake.

Unless you're clairvoyant, it's impossible to say when the situation will improve for the beleaguered telecommunications equipment company, which is burning through cash faster than a gambler at Atlantic City on payday. In June, the company said it will sustain operating losses of $1.5 billion in the second quarter on revenue of about $4.5 billion.

Before accounting for money raised from financing, Dain Rauscher analyst John Wilson estimates that Nortel burned through $2 billion in cash this quarter. He estimates that debt rose from $1.3 billion in the first quarter to $3.5 billion in the second quarter. Think that's a problem? Standard & Poor's does -- Wednesday, it downgraded Nortel's long-term corporate credit and senior unsecured debt ratings three levels to "BBB" from "A," and its short-term corporate credit and debt ratings to "A-2" from "A-1."

Not turned off yet? Optical-component industry leader Corning (GLW:NYSE - news - commentary) recently said a recovery could be as far as 18 months away. Nortel is looking for a CEO to replace John Roth, and Anil Khatod, the company's chief strategy officer, recently resigned.

The bottom line is that Nortel is running out of cash and is unable to say when it will be profitable again. It had $1.7 billion in cash at the end of the first quarter but burned through $2 billion in the quarter. It has a $2 billion credit line, so short-term liquidity isn't an issue -- unless it starts losing more money than it previously projected.

It's worth noting, however, as I did in late June, that Nortel archfoe Cisco (CSCO:Nasdaq - news - commentary) is debt-free, has $17 billion in liquid assets and thus has the power to ruthlessly cut prices against Nortel.

Still want to buy this "value" play?

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