In a report published on Tuesday, Swedbank AB (OTCMKTS:SWDBY) (STO:SWED-A) analyst Hakan Wranne downgraded Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) from Buy to Neutral and maintained a price target of $3.86 (3 Eur).

Nokia

In the report, Swedbank AB (OTCMKTS:SWDBY) (STO:SWED-A) noted, “Following the acquisition of Siemens‘ 50 percent stake in NSN, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) has reached and exceeded our EUR 3.0 target price. We therefore downgrade the stock to Neutral (Buy). At the current share price, Nokia needs to deliver a decent report in order to avoid a sell-off of the stock, but signals have been mixed. Continued M&A speculation should work as a cushion.”

Swedbank : Key takeaways on Nokia

  • They believe that Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) took smartphone market share in Q2, while signals from Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) and HTC Corp (TPE:2498) indicate that there has been no help from the market and Lumia volumes of 7.6m units, driven by the 520 and 720. They also expect a slight sequential increase in Mobile Phone volumes to 58m units following the weak Q1 performance.
  • With regard to Q3 guidance, consensus expects a 0% margin in D&S and a 7% margin in NSN (Swedbank expect 0% and 6%, respectively).
  • Following the NSN transaction, their SOTP indicates an asset value of EUR 3.8 per share plus cash of EUR 0.6 per share. Their SOTP value for NSN was very close to the multiples paid for Siemens’ stake.
  • The NSN deal opens up for renewed M&A speculation. Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) can now decide its own strategy. Possible outcomes include a sale of the phone business, an IPO of NSN or, of course, the status quo. The event risk has increased, which increases the risk of short-selling the stock.
  • Swedbank is still far from convinced that Lumia can grab enough market share to generate sustainable profits, and they believe there is a risk that NSN will be increasingly marginalized. The operational risk remains high.

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Opportunities/Risks for Nokia

  • Windows 8 must gain momentum for Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) to recover. Q2 should show good increases in volume. However, the market was not strong in the quarter
  • NSN is losing significant market share, which is starting to show in lower revenues. In the short term, they expect margins to be maintained.
  • The NSN deal has increased the likelihood of additional M&A activity, which should support the stock.
  • The EUR 3bn opex target for D&S means that revenues could erode to EUR 12bn and the unit would still break even at a 25% gross margin.