Yesterday, Nokia Corp. (NOK) suffered a setback as Fitch Ratings downgraded its debt rating by two notches. Fitch downgraded Nokia’s long-term Issuer Default Rating (IDR) and senior unsecured rating to ‘BBB-’ from ‘BBB+’. The rating agency also downgraded Nokia’s long-term IDR outlook to negative. At present, Nokia is just one notch above the junk category issued by Fitch Ratings.
The primary reason for this rating downgrade is an unexpected announcement by Nokia last week in which management significantly lowered its previous second-quarter 2011 financial outlook. Consequently, Nokia abandoned its profit outlook for fiscal 2011 and declined to issue a fresh full-year 2011 financial guidance.
Fitch Ratings believes in the near term, there will be increased erosion of Nokia’s share in the global mobile phone market since its legacy Symbian operating system is unable to cope up with the next-generation consumer taste. Besides, the company’s much-hyped Microsoft Corp. (MSFT) developed Windows Phone 7-based smartphone will not come to market before the fourth quarter of 2011. During this period, the struggling mobile phone giant may witness severe cash flow drainage that will put pressure on its margins.
Fitch further highlighted that Nokia’s Windows mobile-based smartphones have to compete fiercely with established smartphones such as Apple Inc.’s (AAPL) iPhone 4 and several high-end smatphones based on Google Inc.’s (GOOG) Android software. The situation become even worse as various low-cost Asian handset manufacturers, e.g., Samsung, LG, HTC are now flooding the market with low-end mobile phones based on Android.
Fitch’s decision to downgrade credit rating of Nokia is an expected one. Nokia is currently in a state of mess. For the last one and half year, the company is trying hard to revive its past glories but till now failed to do so. In the meantime, it succumbed into newer problems, which gradually eroded Nokia’s global leadership position. Fitch last downgraded Nokia in November 2010.
In the successive months of March and April 2011, Standard & Poor’s Rating Services (S&P) and Moody’s Investors Service downgraded Nokia’s credit rating. Last week, Moody’s has observed Nokia’s debt rating for a possible downgrade. We will not be surprised if these two rating agencies also follow Fitch any time soon.
We maintain our long-term Neutral recommendation on Nokia. This was solely due to a low-level of current valuation, which plummeted more than 44% in last year. Currently, the stock holds a short-term Zacks #4 (Sell) Rank.
APPLE INC (AAPL): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
NOKIA CP-ADR A (NOK): Free Stock Analysis Report
Zacks Investment Research
