Nortel Slides as Customer-Inventory Questions Resurface

Nortel (NT Quote) hit a 52-week low Friday as Wall Street questioned the company's ability to regain its footing in the aftermath of last quarter's customer-buying binge and an ongoing industrywide spending slowdown.

Sliding Slowdown worries trash Nortel stock

Banc of America Securities equipment analyst Chris Crespi told clients Friday morning that Nortel may need until the end of the first quarter to recover from the stockpiling of optical equipment that occurred in the third quarter of this year. Nortel fell $1.44, or 4.2%, to $33 Friday amid a mild tech selloff, leaving the stock at barely a third of its peak value.

WorldCom (WCOM Quote) and Qwest (Q Quote) have emerged as the culprits of the great hoarding fiasco that knocked Nortel off its game. Both WorldCom and Qwest, without knowledge of each other's actions, double-ordered some coveted optical networking equipment and warehoused the gear rather than installing it. This blindsided Nortel, causing it to miss revenue expectations and fall nearly $2 billion short of the $12 billion in 2000 optical sales the Street had come to expect.

Adding to the problem, Crespi said rival Ciena (CIEN Quote) has won business from Qwest, possibly at Nortel's expense. And as telecommunications spending figures to cool off in the coming year, Nortel faces an even harder environment in which to rally.

Nortel, which has an analyst meeting scheduled for Tuesday in Boston, says Crespi's observations are unfounded.

But other industry observers size up the problem as a "prove-it" scenario.

Nortel's customers saw their inventory building, says SG Cowen securities analyst Michael Jung, who rates the stock buy. As a result, "With lead times lower, some of Nortel's customers could hold off on some purchases, leading to a sequential decline in optical sales," Jung says. His firm hasn't underwritten for Nortel.

"The debate," says Jung, "is whether this will continue to be an issue in the fourth quarter."