Nokia Could Pull Back Soon: Bernstein

Nokia Could Pull Back Soon: Bernstein

Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) will release its next earnings report tomorrow, and Bernstein analysts think the company could disappoint on earnings but beat on revenue estimates. However, they think the company’s stock could pull back, not only because of disappointing earnings, but also other news.

What to expect in Nokia’s earnings report

In a report dated April 28, 2014, analysts Pierre Ferragu, Jasmeet Chadha and Joe Del Gaudio list four reasons Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) shares could pull back over the next few weeks. In terms of earnings, they do believe NSN will be able to begin growing again at the top line during the second half of the year, but they believe Nokia will sacrifice margins as a result.

The Bernstein team is expecting a significant miss from Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) this time around. In fact, they’re projecting operating earnings which are 26% lower than consensus estimates. They believe consensus might be assuming that a tax rate that’s too high.

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Here are their estimates:

Nokia could announce a dividend

The Bernstein analysts also believe Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) will announce a special dividend. They think the announcement could come with tomorrow’s earnings report or else within the next few days or weeks. They note that the company should have approximately €14.5 billion in gross cash on its balance sheet now that the deal with Microsoft Corporation (NASDAQ:MSFT) has closed. That’s €7.8 billion in net cash.

If the Finnish company is going to keep its balance sheet strong, they expect it to keep between €4 billion and €6 billion in net cash on their balance sheet. The result would be a special dividend of between €2 billion and €4 billion, which amounts to between €.50 to €1 per share. They believe most investors are expecting a dividend in that range and that most bulls are expecting it to be on the high end. However, they suspect management will push for the lower end of the range so that the company can “be in a position to actively participate to a last round of consolidation in the industry.”

Although they don’t expect Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) to sign a merger agreement with Alcatel-Lucent in the near term, they see it as becoming “necessary” at some point in the future.

Nokia’s new CEO expected to be named

Most also expect Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) to name Rajeev Suri its next CEO. The Bernstein team sees this as being “the right thing to do,” but they expect that the company’s valuation will start to normalize. They say most bull cases rest on potential upside Nokia could see from its intellectual property. If Suri, who has been heading up the Network division, gets the job, Wall Street will see it as a signal that the company is a Telecom Equipment company and that 40% of its profits will come from intellectual property. They think this will be a problem if investors start to see Nokia as a Telecom Equipment company rather than an IP-focused company.

Nokia compared to Ericsson

As a result, they see a number of comparisons with Ericsson (ADR) (NASDAQ:ERIC). They note that right now, Ericsson trades at about 14 times 2015 earnings and has an EV of eight times 2015 EBIT and .9 times 2015 sales. Bernstein analysts put together a chart which shows some striking similarities between Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) and Ericsson. The two companies’ balance sheets are similar, so their multiples would likely be similar, implying a share price ex-dividend of €3.5, assuming a €1 per share dividend.

Nokia profits

They believe Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) could trade at a discount to Ericsson (ADR) (NASDAQ:ERIC) because of profit metrics. Because of this, they say Nokia is trading 20% above their price target. They don’t think the gap will close right away, as investors will still expect long-term patent licensing upside. However, they think it could happen over the next few weeks.

Bernstein analysts have a Market-Perform rating and €4.25 per share price target on Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V).

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