I have written before about Nokia (NOK) and outed myself as a convinced bull in the sense that I believe Nokia can not only turn its losses around, but also is worth significantly more than what the market currently quotes. That being said, I am long NOK common stock and warrants and I intend to hold both of them until NOK has fully rebounded and caught up to its competitors: A great distressed equity play that comes and falls with Nokia's ability to penetrate the smart phone market.
Nokia released Q2 2012 numbers Thursday and the results were mixed:
- Sales were slightly higher at EUR 7.5 billion (compared to Q1 with EUR 7.4 billion)
- Nokia significantly widened Q2 loss of EUR 1.41 billion (EUR 0.38 per share) compared with a Q2 2011 loss of EUR 368 million or EUR 0.10 per share last year
- The Devices & Services operating margin, based on Non-IFRS accounting, is expected to stay at minus 9.1% in the third quarter 2012 - a Q2 hit of EUR 220 million inventory-related allowances for Lumia, Symbian and MeeGo devices
- Price reductions for Lumia phones to stimulate volume
Those are the hard and nasty facts and they do not look pretty. So why are investors sending Nokia stock higher by about 7% if the picture is as nasty as bears want you to believe? Here is why:
1. Lumia sales increased to over 4 million compared to 2+ million a quarter ago. Even though Q1 was weak in terms of Lumia sales, momentum in sales can build quickly. I also understand and do not deny that Nokia is far behind Apple (AAPL), Google (GOOG) and Samsung. Given the features and design of the Lumia series, I can envision that this model will be accepted by the market. The catalyst could be the introduction of the Windows 8 phone.
2. Losses were partly driven by either restructuring related charges or non-cash items. Both items should not play a role for investors who normalize cash flow levels and earnings. Since the company moves proactively to address short-term negative margin outlooks and consolidates its manufacturing footprint in Asia, the company deserves more time for their restructuring strategy to prove successful.
3. Cost control initiatives are under way, especially in the Devices & Services segment.
4. Q2 phone sales were increasing to 73 million pieces which is encouraging.
5. Nokia's high net cash position of EUR 4.2 billion is highly appreciated by investors as worries about a higher cash-burn rate are alleviated.
6. Nokia slightly beat adjusted EPS estimates by EUR 0.01.
7. Introduction of full touch Asha devices could be promising going forward.
Analysts second bulls in arguing that:
"After a seemingly endless run of bad news, these results offer a glimmer of hope for Nokia," said Ovum analyst Nick Dillon.
Investors should give Nokia's management more time to restructure the business and to allow Lumia to build sales momentum. Sales of Lumia phones in the Christmas quarter 2012 will give analysts a better idea as to how competitive the phone is and if further price slashes for its flagship product are needed to stimulate demand. Despite the widened Q2 loss, investors should not extrapolate as the majority of charges were technically non-recurring. I still believe that Nokia makes for a great contrarian turn-around investment with a P/B of only 0.50 and a conceptualized and pointed restructuring plan aimed at improving margins. I am holding on to my position at least over the next 2-3 years. Hated stocks oftentimes prove to be the most lucrative.
An investment in Nokia is not without risk. CDS trade with over 1,000 basis points indicating very high investment risk and a high probability of bond default. Investors should be aware that they could lose their entire principal as the company fails to deliver better business results.
Disclosure: I am long NOK.