warned again last night. Analysts once again reduced their estimates. It's deja vu all over again.
Analysts, on the whole, almost seemed bored by the idea of another revision to earnings estimates. Many expected more trouble from Nortel. That said, nearly every major brokerage on Wall Street issued a note about the company, and some were quite negative.
analyst Tom Astle downgraded the company to neutral from accumulate, citing a global economic slowdown and across-the-board spending cuts that will most definitely affect the amount of money Nortel has coming in over the new few quarters. And to make matters worse, the company doesn't really have any new products that people will buy.
"Our view is that we are in a product transition dead zone," he wrote.
Nortel, the world's largest supplier of telecommunications equipment, said it would lose even more money in the first quarter than it had originally predicted on Feb. 15. It marks the company's third profit warning about this quarter. Nortel slashed estimates back to a 10 cent to 12 cent loss on revenues between $6.1 billion and $6.2 billion. It also said it would cut 15,000 jobs by mid-2001, adding another 5,000 onto the 10,000 it's already cut.
And to make matters even worse, the company said it could not give any guidance about 2001. None whatsoever. As a result, expect other networking-related companies with the same customers -- like
-- to come under a great deal of scrutiny. Expect the wider market rally to feel the affect as well; this is the first huge piece of bad news it has dealt with since the
Dow Jones Industrial Average spiked to 9106 last Thursday.
Morgan Stanley Dean Witter
analyst Alkesh Shah said the company isn't out of the woods yet. Despite coming way off its 52-week-high of $89, closing yesterday at $16.76, the analyst said that Nortel stock could go down to $11. He also said that the company will be back to give more financial guidance.
J.P. Morgan H&Q
also reduced their fiscal 2001 forecasts in the company -- as will many major Wall Street names as they adjust their forecasts to come in line with lowered guidance.
got slapped around after warning last night. Early morning trading had it losing almost half its value. Investors and analysts alike expressed surprise that the handheld gizmomaker won't post a profit in the second quarter -- since it had better-than-expected earnings of 2 cents a share in the just-announced first quarter.
Goldman Sachs analyst Vik Mehta had the lowest forecasts for Palm's future, and even he was shocked by the depth of Palm's warning. He reduced his rated on the company to market outperform from the U.S. recommended for purchase list, while cutting back his already low targets.
"We were blindsided by the significant reduction in next quarter's guidance," Mehta wrote to investors. "We had the lowest estimates on the street at $556 million (in revenues) and 3 cents a share (in earnings), and Palm guided to approximately $310 million and an 8 cent loss."
Gillian Munson, an analyst with Morgan Stanley Dean Witter, cut her rating to market outperform from strong buy, while slashing at earnings estimates. Munson said the miss could affect investor faith in the company.
"We expect investors' loss of confidence in management will be significant," she wrote. "It appears that Palm has stuffed the channel in the midst of slowing economic issues and a product transition."
In other words, Palm took a ton of Palm Pilots and stuck them in stores right at the end of the quarter to help burn off some inventory. The only problem with doing that is that the company will have to lower prices, which cuts into future profit margins. The same phenomenon occurred this Christmas at retailers like the Gap, who took high-margin clothes and hung them on low-margin sales racks to make room for the new season's fashions.
analyst Eric Rothdeutsche said Palm was planning to do just that -- lower prices to burn off the inventory.
"The company is planning on accelerating discounts and promotional activity to move inventory, further weighing on gross margins moving forward," he wrote in a note that downgraded the company to long-term accumulate from buy, citing those "ballooning inventory levels."
"Inventories grew $70 million quarter-over-quarter and are expected to grow by $200 million in the fourth quarter due to a significant inventory build that already has been committed to, in spite of the company's attempt to cancel incoming orders and postpone production," he wrote.
The problem with Palm is that it's stuck between two floors. Its feet are stuck in a massive inventory glut -- something that many other tech companies also face. Meanwhile, its head is looking ahead, hoping to launch innovative new products that'll help spark demand. But the company cannot push new products if its old ones are taking up all the shelf space. It'll end up cutting into profits, something that Palm recognized last night.
Merrill Lynch analyst Melanie Hollands cut the company to neutral from accumulate and said she would not be a buyer of its stock, because of an inventory buildup of older models and a near-term saturation in the market -- very similar to what Morgan's Munson and others were saying.
: UP to buy from accumulate at Merrill Lynch.
Dollar Thrifty Automotive Group
: DOWN to buy from strong buy at
Credit Suisse First Boston
: NEW U.S. recommended for purchase list at Goldman Sachs; price target: $24.
: NEW U.S. recommended for purchase list at Goldman Sachs; price target: $30.