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Nokia Oyj (ADR) Gets a Price Target Cut Following a Rocky 3Q Showcase

Tim Long says the only strength of NOK's quarterly print stems from a one-time item.


Nokia Oyj (ADR) (NYSE:NOK) unnerved investors yesterday with a dismal showing for its third quarter earnings and a weak market guide for this year and next for an outlook that has already seen a reduction. The NOK team sees a light at the end of the tunnel in the next two years, but the Street is not satisfied with these expectations, with shares subsequently clattering to the market floor to the harsh tune of 21%.

BMO analyst Tim Long is on the sidelines for now without a great deal of confidence or positivity on this telecom giant, reiterating a Market Perform rating on NOK stock while trimming the price target from $6 to $5, which represents a 5% increase from where the shares last closed. (To watch Long’s track record, click here)

For the third quarter NOK posted €5.5 billion in revenue and €0.09 in EPS. Thanks to a licensing catch-up payment from LG, Nokia was able to outclass EPS expectations by €0.03 ahead of both the analyst’s as well as the Street’s expectations of €0.06. However, revenue underperformed both the analyst’s forecast of €5.8 billion as well as the Street’s estimate of €5.6 billion.

Gross margin hit 42.7%, a better number than Long had anticipated, but it is worthy to note that without the one-time item in the picture, gross margin would have merely aligned with expectations rather than realizing a beat. Market guidance for the year endures another reduction, now an even deeper dip anticipated from a 3% to 5% decrease to a 4% to 5% downturn.

From Long’s perspective, while the new outlook is not looking good, he is not shocked by the revision: “Updated guidance is worse than previously thought, but remains in line with our global infrastructure model estimate of a 4.5% y/ y decline.” After all, keep in mind that even rivals like Ericsson have a tough road ahead, continues Long, noting, “Last week, close competitor Ericsson also issued a more negative outlook for its networks business, with expectations for further difficulties into 2018.” For 2018, the giant angles for a 2% to 5% year-over-year drop in networks.

Meanwhile it certainly does not help that “technology transitions, including initial planning for 5G, the move from 100G to 400G, and operator M&A have all disrupted spending patterns,” adds the analyst, who likewise points out ALU product integrations headwinds nipping at Nokia’s Mobile Networks’ heels. Taking under account rising equipment swap expenses for next year, the analyst expects EPS could fall €0.07.

Long contends, “Nokia reported largely negative 3Q17 results, and EPS beat only because of a one-time item. Networks missed estimates and Technologies was in line excluding a catch-up payment. Management’s market guidance for 2017 and 2018 is bleak, though margins are hanging on thanks to ongoing progress on synergies. Management believes a market recovery could come as early as 2019, though we remain less optimistic, as we believe 5G won’t be able to offset weakness elsewhere in Networks.”

As a result, the analyst has likewise adjusted his EPS forecasts for 2017 from €0.27 to €0.30 and for 2018 from €0.27 to €0.24.

Wall Street absolutely echoes Long’s tone of caution on the telecom giant, with TipRanks analytics exhibiting NOK as a Hold. Out of 3 analysts polled by TipRanks in the last 3 months, all 3 remain sidelined on Nokia stock. With a return potential of 26%, the stock’s consensus target price stands at $6.00.