Two stocks for patient investors: Nortel and Teleglobe offer excellent long-term potential

Money Digest, August, 1998 by Patrick McKeough

Northern Telecom (TSE: NTL; Rating: Average; Recent price: $82) fell $13 on June 15, the day it announced a $9.1 billion merger with Bay Networks. But the TSE 300 index fell 206 points that same day, its worst loss in years. So Nortel might have dropped anyway.

Nortel says the merged company will be able to offer advanced equipment for Internet connections and computer networks. This strategy attracted a good deal of sneering from investors who think Nortel and Bay are hopelessly outclassed by Cisco Systems, the leading maker of networking equipment. Bay, number three in the industry, recently hit a profit downturn while Cisco soared.

Nortel was a chronic underperformer until the early 1990s. But between 1994 and 1997, its sales and earnings roughly doubled. Nortel's financial resources, its research (it spends 14% of revenues on research and development), and its BCE connection (BCE owns 51.1% of Nortel, but that will fall to 41% with the merger) could give Bay the foothold it needs to prosper.

The takeover raises Nortel's risk, but its shares may merely go sideways. I continue to view the company as a long-term buy.

Teleglobe (TSE: TGO; Rating: Above average; Recent price: $41) also has detractors, since its monopoly on Canadian overseas phone calls ends on October 1. But Teleglobe worked to end its monopoly early, so it could offer new services sooner.

Teleglobe stock has nearly doubled since the start of the year. Its share price rose $0.25 on June 15 (the day Nortel fell $13 and the TSE fell 206 points), when Teleglobe announced its planned merger with Excel Communications Inc., a U.S. long-distance provider.

Teleglobe/Excel will be North America's fourth-biggest long-distance carrier. It'll have one-quarter the revenues of Sprint, the third-biggest, but Teleglobe's overseas network provides an advantage.

BCE owns 24% of Teleglobe. BCE will buy some Excel stock before the merger, but its Teleglobe interest will still fall to 16%. It has options to raise it back up to 20%. The merger is good news for Nortel/Bay, since BCE-related companies are likely to support each other's interests. I view Teleglobe as a buy.

Patrick McKeough is publisher of The Successful Investor (ste. 977, 6021 Yonge St., Toronto M2M 3W2; phone 416-222-3759; fax 224-9214) and director of Second Opinion securities advisory services.