Nokia Downgraded as Massive Layoffs Loom

Includes: HTCKF, MSFT, NOK
by: Alacra Pulse Check Blog

By Sheena Lee

Nokia (NYSE:NOK) announced that it will start to lay off thousands of employees, the firm’s harshest job cut in 20 years, and more challenges lie ahead as the Finnish mobile giant plans to integrate its new partnership with Microsoft (NASDAQ:MSFT). Meanwhile, Morgan Stanley analyst Patrick Standaert cut shares of Nokia to Underweight from Equalweight, causing the company’s stock to slide in Europe.

On April 1, saying that Wall Street’s earnings estimates for Nokia are far too high, Nomura analyst Stuart Jeffrey cut his rating on the stock to Reduce from Neutral, and sliced his price target on the shares to 5.60 euros from 8 euros, Forbes reported.

Last week Moody’s downgraded the long- and short-term debt ratings for Nokia because of its weakened market position in mobile devices.

“The rating downgrade primarily reflects Nokia’s weakened market position in its core business, mobile devices, which has reduced the company’s margins and funds from operations,” Moody’s Nokia analyst Wolfgang Draack said in a statement.

Standard & Poor’s also downgraded Nokia’s long-term rating to "A-" on likely weaker operating margins.

Finnish trade union Pro estimates that over a span of two years, Nokia may cut between 1,000 and 2,000 jobs in its home country, most of them in research and development, Finnish newspaper Kauppalehti reports. The total number of jobs threatened could eventually reach 6,000, and that would be equivalent to 38% of the company’s global devices R&D workforce, said Bloomberg News.

“Nokia has announced that it will still produce about 150 million Symbian phones. Based on that, we have calculated the possible number of job cuts,” Chairman Antti Rinne of Pro said. Click here to find out more!Nokia Chairman Jorma Ollila has said redundancy talks with employees will begin in the last week of April.

Nokia’s R&D is spending nearly three times that of its rivals and five times that of Apple (NASDAQ:AAPL), pointed out All Things Digital’s John Paczkowski. ”There’s little reason to continue to spend that kind of cash on research and development now that the company’s dumped its own software platform in favor of Microsoft’s,” said Paczkowski.

“It’s just a bit too late to put Humpty Dumpty back together,” said Tero Kuittinen, analyst at MKM Partners. “Developers are bailing out in droves."

Nokia is also getting beat out by players like Taiwan’s HTC (OTC:HTCXF), which launched two more sophisticated smart phone models this week.

“The new HTC Sensation phone reflects the mountain Nokia needs to climb to close the hardware and software gap with its rivals,” Ben Wood, research director at CCS Insight, told Reuters. “On the day Nokia unveils the 600Mhz X7 ‘entertainment phone’ it has been trumped by HTC’s Sensation which has a dual-core 1.2Ghz processor."

But it is not all bad news for Nokia. Goldman Sachs analyst Tim Boddy upgraded the company on March 28 to a Buy from Neutral with a $12.40 price target. Goldman now believes the decision to focus on smart phone hardware design, assembly and distribution is appropriate and returns Nokia to its core competencies. Despite likely near-term volatility as it goes through a difficult 12-18-month transition period, they believe that cost reduction can be larger than investors anticipate, while the collapse in handset market share and margins implied by the valuation is excessive.

RBC Capital analyst Mark Sue on April 1 repeated his Outperform rating on Nokia shares, but cut his target on the stock to $12, from $14. Sue contends fears that consumers will abandon Symbian phones in droves so far have not been realized.

Nokia is currently trading below the mean 12-month analyst price target of $9.50 in our previous Prognosis Update.

Sources: Alacra Pulse, IBTimes, Total Telecom, Dow Jones Newswires, Reuters, Bloomberg, All Things Digital, Global Times, Notable Calls.