Shares of Nortel Networks ( NT) were falling after UBS Warburg downgraded the company, citing the SARS outbreak in China and the company's poor revenue momentum.

Recently, shares were down about 2.61% to $2.99.

The brokerage downgraded Nortel to neutral from buy with a $3.05 price target. Nortel needs to sustain revenue growth for a meaningful stock price appreciation, Warburg said, and says it doubts revenue growth would materialize in the immediate future.

Due to SARS in China, Warburg believes demand will be down sequentially from the first quarter. Further, the brokerage said, in the U.S., a seasonal increase in demand isn't likely in the June quarter.

On a positive note, Warburg said it sees Nortel gaining ground in the circuit to packet market in 2003 and 2004 but said "this appears to be the only major business line in our view that is currently in a sustainable growth trend." The brokerage expects that Nortel will win a circuit to packet contract at WorldCom, calls itself MCI ( MCI) now, later this year.

"While we believe Nortel has done an excellent job in restructuring the company to achieve a strong gross margin of 42.9% in the most recent quarter, we believe the stock more than fully discounts the restructuring efforts at this price," Warburg said, adding that the stock has risen 86% since the beginning of the year.

Warburg expects Brampton, Ontario-based Nortel to break even in the second quarter, in line with analysts' consensus estimate, after losing 9 cents a share in the second quarter of 2002. For 2003, the brokerage sees Nortel earning 2 cents a share. Analysts expect 2 cents a share; the company lost 33 cents a share in 2002.