Nokia: A Bad Situation Turning Worse

| About: Nokia Corporation (NOK)

Nokia (NYSE:NOK) is a risky investment with minimal rewards at this point. Interested investors should wait until at least the end of Q3 or Q4 of 2012 before buying shares in Nokia. Nokia has recently been downgraded by the S&P to junk status. Investors will be better off waiting to hear the progress in cost reduction in order to project whether survival, bankruptcy or an acquisition is more likely for 2013 or 2014.

Nokia's current price per share is under $3. This is enticing to many aggressive investors but it will be a significant amount of time before this price rises, if it all. The stock price will most likely decrease throughout the remainder of the year unless Nokia is able to reduce costs and generate impressive sales growth by the end of 2012. The enterprise value is more than $6 billion less than the market cap. This suggests that too many people are already invested in this overvalued stock. The beta is between 1.5 and two, this is more startling than reassuring considering the liquidation and competitive obstacles on Nokia's horizon. The stock price is around its 52 week bottom of $2.68. The stock price is also below the 50 and 200 day moving averages of $3.51 and $4.89, respectively. The few positive indications are a price to sales ratio around .24 and both the current and quick ratios are above 1.25. The return on equity, the net margin and the operating margin have all been decreasing for the past three quarters.

The issue with Nokia is the cost of restructuring is burning through its cash reserves. At the current rate, Nokia may not be able to pay its short-term bonds without impressive sales growth. Nokia has burned through $2.1 billion in the last five quarters and will most likely spend more throughout the rest of 2012. Nokia also reported a decline in sales by 26 percent in the last quarter year over year. The expense of manufacturing its own products and operating its own plants is tremendous. Eventually Nokia will have to change its business model and may have to sacrifice quality by outsourcing in order to decrease its spending over the next year. Increasing competition is another serious issue Nokia is facing.

Samsung (OTC:SSNLF) is single handedly putting Nokia out of business. Samsung is now the largest seller of mobile phones in the world, replacing Nokia as number one. Samsung has benefited by supplying the world with both smartphones and standard mobile phones. Nokia's late arrival in the smartphone market is one of the reasons it has struggled keeping pace with competitors. The decreasing margins on standard phones have not been enough to offset the high cost of manufacturing high quality but standard issue products. Nokia's stock price has decreased by over 60 percent within the past year and over 35 percent since the beginning of 2012.

Research In Motion (RIMM) is another mobile phone producer facing extinction but its ability to minimize expenses has served it well through a sales decline of 20 percent in the last quarter. Nokia's share in the worldwide market share of cell phones has fallen to 19.8 percent compared to Samsung's increasing 20.7 percent. Apple (NASDAQ:AAPL) now has 29 percent of the smartphone market and is the leader in the industry. Nokia's smartphone Lumina will be the major catalyst behind a successful turnaround. The Lumina is number five on Amazon's (NASDAQ:AMZN) best seller's list and Nokia was able to sell 2 million units of the Lumina Series in the first quarter. Nokia has more smartphone sales in China than Apple, but the problem is the margins are much lower for the low end Lumina 800C and 610C. Another problem in these markets is the substantial competition Nokia faces from Google (NASDAQ:GOOG) Android smartphones that are less expensive. Google's recent acquisition of Motorola Mobility also does not bode well for the future of Nokia in the smartphone market.

Aside from increasing competition, Nokia needs to decrease its operating costs in order to survive into 2015. The restructuring in 2011 and 2012 has hampered earnings but it is a necessary evil in order to bring down costs over the long-term. There are one-time fees it has had to encounter that have brought down earnings through the past few quarters. More importantly, Nokia needs to focus on decreasing its labor and manufacturing costs. Nokia had over 130,000 employees in 2010. Since 2010, Nokia has had to close facilities and layoff expensive employees in countries like Finland, Germany and the UK. These countries represented the highest wages of Nokia employees, exceeding on average over $60,000 per employee. Nokia has been focused on shifting from Europe and increasing employment to less expensive regions like Vietnam, China and India. Restructuring its labor and manufacturing models are essential for Nokia's survival and growth into the future.

Focusing on smartphones is also essential. Nokia is an essential piece in the aggregate cell phone market. Telecom and software manufacturers need Nokia to survive for the sake of parity and price control in the market. The demise of Nokia means that Samsung and Apple will be able to increase prices on telecoms that will eventually trickle down to the consumer. AT&T (NYSE:T), T-Mobile (OTCQX:DTEGY) and Microsoft (NASDAQ:MSFT) are all contributing funds to Nokia through various contracts in order to impede its demise. T-Mobile is paying Nokia $4 billion to update its networks, while AT&T is assisting with marketing costs. Microsoft is contributing $250 million per quarter to help with R&D expenses. Microsoft will be covering around 20 percent of Nokia's R&D costs.

Nokia's survival depends on the ability to cut costs in 2012 and increase sales significantly through 2013 and 2014. The advent of Windows 8 could be a catalyst to help improve Nokia's smartphone numbers significantly. The growth of the smartphone market around the world and in emerging markets will be essential as well. Eventually it may come down to an organization like Microsoft or AT&T investing in or acquiring this struggling cell phone manufacturer. It is advisable for investors to wait until later in 2012 in order to see how the situation develops.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.