Credit Suisse Sees Signs of Life from Nokia Oyj (ADR) (NOK) Despite Rocky RAN Market Fears

Nokia Oyj (ADR) (NYSE:NOK) could be in better fighting shape than its Radio Access Network (RAN) equipment maker rival Ericsson, who just stumbled roughly 17% last Tuesday after rocky second-quarter earnings. From the standpoint of Credit Suisse analyst Kulbinder Garcha, the RAN market situation is not quite as dire for demand as Eric’s results might suggest.

Eric cut back on its estimates for the RAN market this year, taking expectations to high single digit slumps, and meanwhile, Nokia’s outlook considers low single digit dips when sizing up the primary Total Addressable Market (TAM) for Networks in 2017.

This Thursday will be the telecom giant’s chance to prove where it stands, and even following what Garcha deems “a very challenging 2016” for Nokia, he assesses capital expenditure trends are on the road to recovery for the rest of this year.

“Combining this with ongoing progress in signing more vendors for IPR licensing […]” the analyst maintains an Outperform rating on the stock with a price target of $5.75, which represents a just under 8% downside from where the shares last closed. (To watch Garcha’s track record, click here.)

For the second quarter, the analyst projects sales to hit €5.4 billion, marking a 3% quarter-over-quarter rise with a 2% year-over-year dip, and EBIT of €396 million, signifying a 7% margin. Additionally, the analyst calls for €0.04 in EPS. While EPS expectations mirror consensus, the analyst is less bullish than consensus forecasts looking for €5.62 billion in sales and €447 million in EBIT, which would imply an 8% margin.

Moreover, Garcha anticipates Networks weakness can keep dissolving, as he projects year-over-year decreases of 3% for the second quarter with 2% to follow in the third quarter. This comes on back of 2016’s 12% decline as well as the first quarter of this year that exhibited a 5% waning- all signs of gradual, steady improvement, especially with Nokia’s efforts to cut back on costs. Therefore, whereas Networks EBIT delivered €1.9 billion last year with an 8.9% margin, the analyst estimates the segment can yield €2.5 billion by next year with an 11.7% margin.

“Our analysis also shows NOK significantly under-grew ERIC in US and China last year (which may have been due to ALU integration complexity and swap out decisions leading to higher capex allocation to ERIC footprint), a trend which looks to have already reversed in Q117. We view ERIC’s comments around weak demand likely to be company specific, and model NOK’s Networks sales at -3%/flat in 2017/18,” highlights the analyst.

Garcha concludes looking at strides forward with Intellectual Property Rights (IPR) from encouraged light, asserting, “With Nokia signing broad-based licensing agreements with Apple in May and with Xiaomi in July, we see further potential to license more vendors like Huawei, LG and tier-I China brands. On Apple, we wait for more disclosures of terms of the deal, which could be a source of positive surprise, given the deal was composed of a large upfront payment (incremental cash return due in Q3) and small ongoing payments.”

TipRanks analytics demonstrate NOK as a Buy. Based on 11 analysts polled by TipRanks in the last 3 months, 3 rate a Buy on Nokia stock while 8 maintain a Hold. The 12-month average price target stands at $6.95, which aligns with current levels.

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