Nokia: Just Punched or NOCKed Out?

Nokia’s Corporation (NYSE:NOK) fortunes have been mixed of late. Despite sales of over 4 million Lumia handsets, the company reported a $1b operating loss in Q2. The recent increase in its stock price attributed to insider buying as a confidence boosting measure has not worked; Goldman Sachs Group, Inc. (NYSE:GS)  downgraded it to a sell on Friday. Apple  (NASDAQ:AAPL) and Android devices have dominated the smartphone market and delivered a strong blow to both Nokia and Blackberry maker Research in Motion (NASDAQ:RIMM). Any hope that Nokia’s partnership with Microsoft Corporation (NASDAQ:MSFT) would help it to recover seems to have faded away following Lumia’s relatively minor impact on the market shares of Apple’s iPhone and Samsung, the largest Android handset maker.

We decided to take a look at the story that emerges from the numbers.

Nokia Market Cap, Previous Day Stock Price, Classification, Filing dates
Our Fundamental Analysis score for Nokia Corporation (NYSE:NOK) is 22. The Fundamental Analysis score is computed relative to peers by aggregating a host of attributes including Operations Diagnostic, Earnings Leverage, Growth Expectations, Leverage & Liquidity etc. (more here on how we compute scores). Our peers for Nokia Corporation (NYSE:NOK) are:

  • Apple Inc. (NASDAQ:AAPL)
  • Siemens AG ADS (NYSE:SI)
  • Ericsson ADR (NASDAQ:ERIC)
  • Motorola Solutions Inc. (NYSE:MSI)
  • HTC Corp. (2498)
  • ZTE CORP H (763)
  • Research In Motion Ltd. (NASDAQ:RIMM)
  • NEC Corp. (NIPNF)
  • Alcatel-Lucent ADS (NYSE:ALU)

Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day’s close unless otherwise stated.

Overview

  • Nokia Corporation (NYSE:NOK) trades at a lower Price/Book multiple (0.8) than its peer median (1.4).
  • NOK-US’s EBITDA-based price implies better than peer median growth.The market seems to expect a turnaround in the company’s current EBITDA-based return on equity.
  • NOK-US has relatively low profit margins and median asset efficiency.
  • Compared with its chosen peers, the company’s annual revenues and earnings change at a slower rate, implying a lack of strategic focus and/or lack of execution success.
  • Over the last five years, NOK-US’s return on assets has eroded from above median to below median among its peers suggesting declining relative operating performance.
  • The company’s median gross margin and relatively low pre-tax margin suggest high operating costs versus peers.
  • While NOK-US’s revenues have increased slower than peer median, the market currently gives the company a higher than peer median Price/EBITDA ratio and may be factoring in some sort of a strategic play.
  • The company’s relatively low level of capital investment and below peer median returns on capital suggest that the company is in maintenance mode.
  • NOK-US does not seem to have the flexibility to raise more debt.

Share Price Performance

Relative outperformance last month is up from a median performance last year.

While NOK-US’s change in share price of -56.3% for the last 12 months is in line with its peer median, its more recent 30-day share price performance of 11.3% is above the peer median. This suggests the company’s performance has improved more recently relative to peers.
Stock price performance over the last month vs. last year charted with respect to peers for Nokia Corp. (ADR) (NOK-US)

Drivers of Valuation: Operations or Expectations?

Valuation (P/B) = Operating Advantage (ROE) * Growth Expectations (P/E)

Price/Book or P/B valuation is a function of the observed operating performance of the company as measured by ROE multiplied by the market’s current implied growth expectation as measured by the P/E. We define Valuation Premium as the difference between the Market Capitalization and Book Value of Equity, and as a proxy for the NPV of cash-flow associated to the Book Equity investment.
Based on the analysis of the relative contribution to the P/B valuation of “Operations ROE” vs. “Expectations P/E”, we quickly garner insight into peers comparative performance and the market’s assessment of their strategies – are they just “Harvesting” the current business pipeline or are investors betting on a strategic “Turnaround”?

NOK-US has a low return and high growth expectation profile relative to peers.

NOK-US’s PE multiple is negative now so EBITDA ratios provide better peer comparisons. NOK-US’s share price implies higher growth than its peer group median (Price to Ebitda multiple of 62.6 compared to peer median of 8.4). The market also seems to expect a turnaround in NOK-US’s relatively low current EBITDA return on equity of 1.0%. The company trades at a lower Price/Book multiple of 0.8 compared to its peer median of 1.4.
Drivers of Valuation: Operations or Expectations? Operating Advantage or ROE% vs. Growth Advantage or P/E for Nokia Corp. (ADR) (NOK-US)

Operations Diagnostic

NOK-US has relatively low profit margins and median asset efficiency.

The company’s profit margins are below peer median (currently -10.1% vs. peer median of 6.1%) while its asset efficiency is about median (asset turns of 1.0x compared to peer median of 0.9x).
Graph of ROE% on Common Equity showing Peer Median (TTM) for Nokia Corp. (ADR) (NOK-US)

NOK-US has maintained its relatively low net margin profile from the recent year-end.

NOK-US’s net margin is its lowest relative to the last five years and compares to a high of 14.1% in 2007. Though its net margin decreased to -10.1% from -3.0% (in 2011), its peer median remained relatively stable during this period at 6.1%. Net margin fell 6.9 percentage points relative to peers.
NOK-US’s asset turnover is its lowest relative to the last five years and compares to a high of 1.7 in 2007. Compared to 2011, asset turnover has remained relatively stable for both the company (1.0) and the peer median (0.9). Overall, asset turnover and net margin trends suggest that NOK-US’s ROA at -10.1% is its lowest relative to the last five years and compares to a high of 23.4% in 2007.
Graph of Net Margin% showing Peer Median (TTM) for Nokia Corp. (ADR) (NOK-US)
Graph of Sales/Total Assets showing Peer Median (TTM) for Nokia Corp. (ADR) (NOK-US)

Earnings Leverage

Lagging revenues and earnings imply a lack of strategic focus and/or ability to execute.

Changes in the company’s annual top line and earnings (-3.5% and -166.6% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.
Earnings Leverage Earnings Growth % vs. Revenue Growth % charted with respect to peers for Nokia Corp. (ADR) (NOK-US)

Sustainability of Returns

Relative to peers, recent returns have eroded versus last five years.

NOK-US’s return on assets currently is less than peer median (-10.1% vs. peer median 3.8%) in contrast with its higher than peer median return on assets over the past five years (7.6% vs. peer median 4.8%). This performance suggests that

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