Clearly, Wednesday's debt-rating cut by Standard & Poor's didn't exactly put
investors at ease going into an already troubling second-quarter earnings report from the telecommunications equipment company.
Wall Street will likely be bracing for the worst tonight, given that Standard & Poor's got a good look at the books and decided to act before the official release of Nortel's results.
But while the market is assuming there's another unforeseen calamity ahead, let's take a more careful look. First, the downgrade was long expected, and while it was a three-notch demerit, it's still two notches above junk status. Second, there's a silver lining: Nortel is off credit watch for the time being.
And, thanks to Nortel's
preannouncement last month, we know much of the bad news already. Yes, $19.2 billion in net losses. Knew that. One year, maybe more, from profitability. Knew that.
We also know that the fundamentals of the communications equipment business could hardly be any worse. Here's a repeat of the big themes: Phone companies (i.e., Nortel's customers) have been slashing network equipment spending since last fall. Weaker phone companies have been going out of business since last fall.
Meanwhile, Nortel has fired one-third of its worldwide staff and lowered its cost structure to the point where it can start to break even again when quarterly revenue reaches $5 billion.
So here's the thinking among some sell-side circles: Nortel isn't going out of business, so barring a major disaster, some people will want to be early to the Nortel turnaround. That doesn't mean the company is rock solid. In fact, it's far from it. But it does mean that the mood is likely to change ever so slightly from negative to positive on Nortel.
And that's about the time some big institutions will be thinking it's safe to buy some positions.