Turnaround Letter Buy-rated Nokia (NOK) reported third quarter revenues of EUR 5.7 billion, up 4% from a year ago and in-line with consensus estimates. Adjusted earnings per share of EUR 0.05 fell 17% from a year ago yet was in-line with consensus estimates.
However, Nokia’s shares fell 24% yesterday on very disappointing news about costs that the company needs to incur to catch up to competitors in new 5G products. We also add that the industry’s rollout of 5G isn’t happening as quickly as perhaps the company and investors had hoped.
Nokia acknowledged that is facing more aggressive competition from both Ericsson and Huawei, weaker sales of its higher-margin products, more expensive 5G development costs, and likely slower spending from Sprint/T-Mobile (merger is pending). The company has fallen behind its two rivals. Benefits from 5G product sales won’t likely occur until 2021 or later.
The company guided to a much weaker fourth quarter and 2020 and suspended its dividend for at least two quarters to preserve cash. The net cash position (cash less debt) on the balance sheet declined to EUR 344 million, down from EUR 502 million in the second quarter and down from EUR 3.1 billion at year-end. This year, the total cash position has declined by nearly EUR 2 billion while debts have increased by EUR 600 million. Nokia said it would resume the dividends after it returned to a EUR 2 billion net cash position.
With the stock lower than at any point in the past six years, and with the industry’s inevitable migration to 5G, we find it difficult to bail on Nokia despite its dismal outlook over the next two years. Yet, the complicated story leaves us wondering whether the risks are worth it. At a minimum, the 5-year CEO would appear to be at very high risk of replacement, which could increase the chances of a recovery.
For now, no change to our Buy rating.
Nokia Press Release: 3Q 2019 Earnings
We continue to rate shares of NOK a Buy with a $12 price target.
Disclosure Note: One or more employees of the Publisher own NOK shares.