Flush with cash after the sale of its handset division to Microsoft (MSFT), Nokia's (NYSE:NOK) business transition is on the right track. The firm announced five acquisitions as it follows through on its five priorities. The stock is now trading firmly at yearly highs, but profit taking in the near term is possible. Once the selling pressure ends, investors could buy Nokia on the dip.
Five priorities
Nokia has five priorities, led by its CEO, Rajeev Suri. The first priority is understanding and engaging shareholders, staff, and customers. Second, Nokia must move from strategy to execution. Third, Nokia is developing of key systems corporate-wide to measure performance. Nokia started to develop performance management process across the company. Fourth, Nokia is developing a common culture. This will help the company run more effectively as a single entity. The fifth priority is to improve operational performance.
Second quarter impresses
Investors cheered after Nokia reported second-quarter results. Non-IFRS gross margin was a healthy 44 percent, while sales from the mobile broadband front improved by 6 percent. The rollout of LTE in China is continuing. Investors in Alcatel-Lucent (ALU) will also recognize China as an important market for sustained revenue growth. Net sales from networks also rebounded, though the 1 percent increase was helped by currency adjustments. For the year, Nokia Networks won 10 managed services contracts. Demand was so strong that sales were held back by component shortages.
Latin America, notably Mexico, was Nokia's only weak spot. This was due to Nokia exiting some of the less profitable projects. Regulatory changes in the region also hurt results.
Solid outlook
Nokia forecasts non-IFRS operating margin for networks will be between 5-10 percent. Since the firm expects strong results for the remainder of the year, any pullback in its shares at current levels may be short-lived. Nokia closed recently at $8.18.
HERE Maps could improve
Nokia believes it could find ways to improve its efficiency for HERE (its mapping and location division). This is on top of the firm boosting vehicle license sales by 22 percent.
Strong cash balance
Nokia ended the second quarter with $9 billion euro (USD $12 billion) in cash. In April, it reduced its debt by EUR 950 million. To put the cash balance in perspective, Nokia has enough cash to buy Alcatel-Lucent. The latter's stock price fell steadily from $4.60 to $3.73 in 2014.
Nokia committed EUR 1.25 billion for buying back its shares over the next two years. It also aims to lower its debt by another EUR 1 billion.
Risks
Nokia is upbeat for the rest of 2014, but offered no guidance on margin after this year. The Networks division is still not growing, with sales slipping in the first half of the year. 4G deployment projects in China are critical for growth, but contract wins could be delayed.
Bottom line
There are few reasons to doubt Nokia's turnaround story. Investors should expect Nokia will report a strong 2014. This means the good news is baked in its shares. In the near term, profit taking could pull shares lower, but not by much. Investors could wait for a pullback in the stock price to add a position in Nokia.
Disclosure: The author is long ALU. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
