Nokia Corporation (ADR) (NOK) Downgraded To Hold On Margin Worries

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Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) has received a significant downgrade from analysts at Societe Generale, who have been positive on the company for quite some time. They downgraded the company from Buy to Hold, saying that they’re concerned about margins and that the company’s stock has outperformed over the last few months.

What’s left of Nokia: NSN

After Nokia completes the sale of its devices division to Microsoft Corporation (NASDAQ:MSFT), analysts Andy Perkins and Peter Knox believe the main generator of revenue will be Nokia Solutions Networks (NSN). They note that the division has made some important steps toward turning things around, cutting 26,000 employees and restructuring to put more of a focus on things which are profitable.

They say NSN “appears to be well on the way to recovery, showing good profitability despite a shrinking top line.”

Changing strategies at Nokia

However, they believe there’s a change in strategy going on at the management level, citing recent contracts with China Mobile and Sprint. They said NSN seems to be taking “a more aggressive stance” in claiming market share. The analysts said this would tie in with comments made recently by management, who said NSN will be more focused on topline performance.

Their biggest concern here is margins as Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) bids aggressively to secure new contracts. They said revenues should receive a boost from new contracts, but that comes at the expense of margins. The analysts note that consensus estimates for margins at NSN in 2014 are 8.9%. However, they have lowered their estimated margins for NSN to 8% for 2014, which adjusts their sum of the parts valuation for Nokia.

How they value Nokia now

Their new price target for Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) is €5.8 per share. That number comes from a value of €1.9 per share for NSN, €.7 per share for HERE, €1.7 per share in cash, €1 per share in patents and €.5 in tax losses. That’s compared to their previous valuation estimate of €6.2 per share.

The analysts say the biggest downside risk to their target price is if NSN ends up being “extremely aggressive” as it bids for new contracts, pulling margins even further down. They see upside risk if Nokia should sell some more of its assets, suggesting that both the HERE maps division and its patent portfolio would be able to “attract a much higher transaction valuation.”

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