“We are raising our near-term rating on Nokia Corp. (NOK, NYSE) to BUY from HOLD on stronger growth prospects in mid-tier and low-end phones and signs of sustainable margin recovery at Nokia Siemens Networks (NSN). Using the forum of the Mobile World Congress in Barcelona, the mobile industry’s biggest event of the year, Nokia introduced four new phones.
“The two Windows Mobile-based smartphones are the Lumia 720, a mid-range phone, and the 520, an entry-level phone. Nokia also launched two extremely inexpensive feature phones: the 105, at a price point of 15 euros, or about $20; and the 301, which offers internet access and video streaming for 65 euros, or about $85. Our long- term thesis on Nokia has been that it must maintain its global footprint in feature phones while gradually building its smartphone franchise—in preparation for the not-too-distant day when all devices will be software- upgradable and allow high-speed network access.
“Nokia, in our view, is showing signs of achieving this balancing act, but the market has yet to reward any progress. NSN grew its revenues 5% year-over-year in 4Q12, despite shedding wireline assets. By divesting those low-return assets and reducing costs, NSN generated a non-IFRS operating margin of 14.4% in 4Q12 versus a similarly adjusted 4.8% in 4Q11. Although the 4Q12 margin was partly volume-dependent and is not sustainable at that level in 1H13, NSN, too, appears to have turned a corner and is primed for margin expansion on an annual basis. Nokia remains a speculative investment appropriate for risk-tolerant accounts. We do not anticipate a smooth road for smartphones or for the joint venture networking business. But we believe that Nokia under CEO Stephen Elop is executing on its multifront strategy. Moreover, the NOK ADRs, trading below $4 per ADR, appear to represent good value based on many of the valuation metrics we track for the company and its peer group. We are establishing a 12-month target price of $6 for risk-tolerant and patient investors fully apprised of the stock’s volatility.”
Jim Kelleher, CFA, Argus Weekly Staff Report, March 4, 2013
