Nokia Corporation (ADR) (NOK): Looking Beyond The Microsoft Deal

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Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) posted relatively weak topline growth in its latest earnings report, but Citi analysts say there’s no reason to be concerned. In fact, they have reiterated their Buy rating on the company and say that compared to its closest peers, the “new” Nokia which will exist after the sale of its devices division is the cheapest on an EV / EBITDA basis.

Nokia competitors post weak topline

Analysts Ehud Gelblum, Amit B. Harchandani and Stanley Kovler note that Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) wasn’t alone in reporting fairly weak topline growth. They note that competitors Alcatel-Lucent and Ericsson also reported weak topline growth. But they don’t think Nokia’s weak topline is because of losses in share or “a devolving competitive landscape.” Instead, they see the company’s margins as being sustainable because its competitors also had solid margins.

They note Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s NSN division did slightly miss their topline estimates of $4.354 billion, coming in at $4.228 billion. However, after including the one-time charge of around $21 million to $24.5 billion in legal reserves and VAT expenses, which wasn’t in the company’s guidance, they see an operating margin of nearly 12% at NSN, which is in line with their 11.7% estimate.

Nokia could reinstate a dividend

The Citi team has “increased confidence” in Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s ability and willingness to reinstate a dividend. They believe the company knows it has plenty of extra cash after it finishes the sale of its devices division to Microsoft Corporation (NASDAQ:MSFT).

As a result, they expect Nokia to be able to return billions of euros in cash to shareholders, although they believe the company is still deciding on the best way to do that, whether it is through share repurchases or dividends.

Trying to read Nokia’s patent potential

The Citi team also still sees significant upside from Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s Advanced Technologies patent division, although they think the amount of upside can’t be adequately measured yet. They say the potential upside can’t be read from this year’s run rate because it will be just a partial year of the $226 million per year licensing payment from Microsoft Corporation (NASDAQ:MSFT). Nokia guided for a run rate of $826 million for this year.

The analysts also believe Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) isn’t currently accruing revenue from Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930). This is contrary to their previous view that the company was accruing revenue from Samsung this year at the same level it did last year. They changed their view after comparing what happened between the two companies to the dispute between Nokia and QUALCOMM, Inc. (NASDAQ:QCOM) in 2006 and 2007. Qualcomm didn’t accrue any revenue until that dispute was over, and currently, the problem between Samsung and Nokia continues.

The Citi analysts said they wouldn’t be surprised if Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s run rate ends up exceeding $957 million after the final agreement with Samsung is signed.

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