Is it just me, or is anyone else having trouble valuing Nortel? If it isn’t the endless stream of earnings re-statements, it is rumors that Nortel may go on a buying spree.

If nothing else, the strong Canadian dollar makes it easier for Nortel to take shots at U.S. companies. Avaya being the latest case study in the Nortel takeover rumor mill.

Is Nortel attempting to re-establish itself as a Canadian growth company. Certainly a deal to take out Avaya would be a step in that direction. It grows market share, and gets Nortel access to Avaya’s lucrative service business. But at what cost?

First of all there is some question as to just how lucrative Avaya’s service business really is. Writes Chris Umiastowski, an analyst with TD Newcrest, service revenue made up 46% of Avaya’s 2006 revenue, but the bulk of that was maintenance work, which may not be sustainable over the long-term.

Umiastowski is not alone. Not many analysts see this as a viable combination. Few synergies in the product mix being one problem. The cost of a takeout being another.

Even before the run up in Avaya, the stock was trading at 19.5 times earnings. When you view that in terms of Nortel’s 14.5 P/E, it makes this deal dilutive to Nortel’s bottom line. Whatever you believe that bottom line to be.

In my opinion, Nortel is a company with a solid earnings stream but no clear cut direction. And while that may seem harsh, it at least frames the company within the context of how investors might want to play it.

At this point, Nortel is anything but a growth story. It acts more like a commodity stock. Decent volatility (37% historic volatility, 34% at-the-money implied volatility) while stuck in a trading range. A combination that makes it attractive as a covered call writing candidate (disclosure note: I have employed covered call writing on Nortel inside my income pool).

As an example, with the stock at $28, the July 28 calls were trading at $1.40. A buy write yields 5.2% (not including transaction costs) over the next eight weeks if the stocks remains the same or is called away.