Nokia: Price Erosion Could Become a Problem

| About: Nokia Corporation (NOK)

Just a brief note after Nokia (NYSE:NOK) blew away estimates Thursday morning on better-than-expected cell phone shipments. Nokia reported .40 Euros per share in diluted profit, roughly 57 cents in U.S. dollars, way ahead of a 45-cent estimate according to Thomson Financial. Sales came in at 12.9 billion Euros, or US$18.45 billion, a bit ahead of estimates for $18.09 billion (the actual press release can be found here).

  • The big point is that Nokia just keeps beating profit expectations even as prices for its phones drop dramatically around the world. Nokia’s average selling price for its phones dropped from 89 Euros in the prior quarter to 83 Euros, or $119, according to Mark McKechnie, who follows the stock for American Technology Research. Nokia sold 112 million phones in the quarter, ahead of Mckechnie’s estimate for 108 million. McKechnie’s keeping his Buy rating on the stock and his $42 price target, but “stay tuned,” he says Thursday afternoon, for what I surmise could be upward revisions to estimates. Aside from average selling prices, the big question, says McKechie, is how much money Nokia left on the table. Because of some shortness in components, it seems pretty clear Nokia could have sold more phones. McKechnie expects new “3G” phones, such as the 6555, being sold through AT&T (NYSE:T), could boost Nokia’s share of the U.S. market in coming quarters, which stands at a paltry 5%.
  • Richard Windsor with Nomura Securities in London says that Nokia is “consolidating its lead,” and that Nokia’s high handset volumes and astute distribution capabilities allowed the company once again to beat margin expectations on its phones. “This is exceptional and is something none of its competitors have any hope of replicating,” writes Windsor. Moreover, Nokia’s networks business join-venture with Siemens (SI) brought in a 3.1% profit margin, better than Windsor’s expectation of break-even, and a big surprise following disastrous results by Ericsson in its equipment business, reported on Tuesday. That means the equipment division should be less of a drag on profit in handsets going forward, predicts Windsor. Nonetheless, even after raising estimates, Windsor believes Nokia’s ordinary shares, trading at around 26Euros, are basically fairly valued, and so he’s maintaining a neutral rating on the stock.
  • Ittai Kidron with CIBC World Markets wonders if the erosion in pricing won’t become a problem at some point. “The key surprise was the miss on [average selling prices],” he writes in a note Thursday. “Nokia is seeing a strong shift toward lower tier, lower priced phones.” “With Nokia delivering on margins, it is difficult to complain […] That said, most of the upside came from a favorable tax rate. If taxes are normalized, the EPS upside is only €0.01. Coupled with ASP declines in every region, suggesting there is more to the story than just mix, Nokia’s ability to show upside relative to elevated expectations is in question.” For that reason, Kidron, like Windsor, thinks outperformance is priced into the stock and he has a Sector Performer rating on Nokia.

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