Nortel Growth Story Takes Unhappy Turn

It's getting harder for Nortel's (NT Quote) beleaguered fans to play the growth card.

The Brampton, Ontario, telecom-gear maker cut its projected annual growth rate in half Thursday, saying third-quarter sales would fall below second-quarter levels and lag behind the industrywide expansion clip. Nortel had been promising it would grow faster than the industry.

Nortel has been rocked this year by an accounting scandal, a deepening legal battle, costly financial reporting delays, a purge of presumably greedy executives and yet another agonizing round of employee cuts.

Yet through it all, some optimists have maintained that hidden by the swirl of setbacks was a core of good products keeping the company on track for steady sales growth.

But that assumption was dashed Thursday, leaving a wake of downward adjustments by analysts and heap of new doubts among investors about Nortel's prospects for recovery.

Some analysts now see uncertainty stretching out over the next several quarters.

In a research note Thusday, CIBC World Markets analyst Steve Kamman cautioned investors that "Nortel does not have published financials and is in the midst of a fundamental strategic reassessment. As such, there remain far more questions than answers about Nortel's future direction." Kamman rates Nortel neutral. Nortel is a CIBC banking client.

Shares of Nortel dropped 26 cents, or 7%, to $3.54 in midday trading after the company reversed its Sept. 2 prediction that sales growth would outpace the overall market. Rival Lucent (LU Quote) dropped a penny to $3.31.

Nortel's new estimate implies 2004 revenue as high as $10.3 billion, which is well short of the $10.65 billion Thomson First Call consensus. The company also cut its third-quarter revenue forecast below the second-quarter level of $2.6 billion. Analysts surveyed by Thomson First Call were expecting revenue of $2.58 billion in the September quarter.