Earnings Scorecard: Nokia Corp. – Analyst Blog

The recent Zacks Consensus earnings estimate revision trend clearly indicates a disappointing outlook for Nokia Corp. (NOK). It seems analysts are highly concerned about Nokia’s success in lucrative smartphone market, which is gradually becoming the next-generation choice. Lack of any immediate catalyst resulted in an extremely pessimistic earning revision trend for the company.

 

 

Nokia’s first quarter EPADR was a penny below the Zacks Consensus Estimate, with revenues also lagging more than 5%. This was primarily due to lower-than-expected mobile devices sales.

 

Though it shipped 21.5 million smartphones in the first quarter, the Nokia gadget is nowhere near battling the iPhone, BlackBerry, or the Android-powered mobile devices on their own ground. As a result, Nokia is gradually losing its market share to Research In Motion (RIMM), Apple Inc. (AAPL) and Google Inc.’s (GOOG) smartphones.

 

Lack of penetration in the high-margin smartphone market is putting pressure on the company’s bottom line. Quarterly ASP of the Mobile Devices was around $83.5, down 6% year over year and also down 3% sequentially. Management now expects an operating margin of 11%−13% in its core Devices and Services segment, down from previous expectations of 12%−14%.

 

 

The overall estimate revision trend is rather glum. In the last 30 days, out of 24 analysts covering the stock, 17 analysts reduced their estimates for the June quarter and 16 analysts reduced their estimates for the September quarter.

 

Additionally, in the last 30 days, out of the 28 analysts covering the stock, 24 analysts reduced their estimates for full fiscal 2010 and 21 analysts reduced their estimates for full fiscal 2011. This strong negative estimate revision trend also holds when we notice that none of the analysts raised the estimate for forthcoming quarters or the full fiscal year.

 

We believe most of the negative sentiment comes from Nokia’s inability to launch upgraded Symbian 3 OS. Smartphones are generally characterized by very powerful operating systems capable of supporting a wide variety of services and applications. Unfortunately, Nokia’s existing Symbian OS is one generation behind the iPhone, BlackBerry, or the Android. The company’s partnership with Intel Corp. (INTC) for Linux-based MeeGo OS is still a distant reality.

 

 

In synergy with the strong downward revision of estimates recently, the Zacks Consensus Estimate has moved down by 5 cents in the last 30 days for both the June and the September quarters. Accordingly, for full fiscal 2010, the Zacks Consensus Estimate moved down 17 cents in the last 30 days. For full fiscal 2011, the Zacks Consensus Estimate also moved down 14 cents.

 

 

With respect to earnings surprises, the company’s fairly good track record is unlikely to persist in the coming quarters. Nokia produced an impressive average earnings surprise of 19.8% in the last four quarters, which means that it beat the Zacks Consensus Estimate by that amount over the last year. However, the current Zacks Consensus Estimates for full fiscal 2010 contain 1.14% downside potential (essentially a proxy for future earnings surprises). Full fiscal 2011 earnings estimate is also containing a downside potential of 0.93%.

 

 

Nokia is facing serious problems in the high-end feature-rich smartphone segment. We remain skeptical regarding its long-drawn strategy of launching price-effective mobile devices. The smartphone market is becoming intensely competitive, forcing Nokia to reduce the ASP that will hurt its profit margin in 2010.

 

Furthermore, the company’s network infrastructure solutions wing is still facing economic headwinds. The severe economic recession has forced telecom carriers to significantly reduce their capital expenditures.

 

All these negative factors resulted in current Zacks Rank # 5 (“Strong Sell”) and our Underperform recommendation for Nokia.