From the Credit Suisee Nokia report (via Schwab)
>> Nokia (NOK1V.HE): Smartphone Risks Intensify
Credit Suisse
31 August 2009
Research Analysts:
Kulbinder Garcha
Deepak Sitaraman, CFA
Achal Sultania
Arjun Gopinath
Andrew Muench
Lowering estimates, downgrade to Underperform. In conjunction with our sector report titled ‘Smart phones….smarter investments’ published today, we are lowering our 2010 EPS estimate for Nokia by 28% to €€ 0.68. Our target price falls to €€ 8.5, and consequently we lowering our rating to Underperform and removing Nokia from our Focus List.
Smartphone share loss in 2010 likely... We estimate smartphones accounted for 51% of Devices gross profits in 2009. Here we believe Nokia’s smartphone share of 45% in Q209 is unsustainable despite recent stability and upcoming product launches, given competitive pressures from RIM, Apple and a slew of new Android-based devices. This means that despite robust smartphone market growth, Nokia will not benefit much operationally. Specifically, we expect Nokia to lose significant share in WE and CEMEA with its global smartphone share falling to 35% in 2010. Lower smartphone share and a relatively weak portfolio prevent a significant margin recovery in Devices and we now assume D&S OMs of 11.4%/11.0% in 2009/2010 ...
... …but scorecard implies a recovery longer term. Despite near term risks for Nokia, we would not overstate risks for the company longer term. In particular, based on our scorecard of smartphone success factors, Nokia narrowly ranks second after Apple, mainly owing to the strength of the company’s brand, distribution, IPR position and chipset efficiency. On a long-term basis, as the smartphone market gravitates toward lower price points, Nokia will be well positioned to leverage virtues such as IPR position and chipset efficiency that will become increasingly more important. Over the next 12 months however, we believe Nokia’s software and services evolution will be too slow to prevent a decline in smartphone market share.
Valuation – inexpensive, but… On our new 2009/2010 estimates, Nokia trades on a P/E (ex-cash) of 13.9x/12x. However, given limited earnings growth in 2009-2010E, we fail to see meaningful upside to shares over the next 12 months. Hence, we lower our rating to Underperform and our TP to €€ 8.5, based on 12x our 2010 EPS plus €€ 0.35 of cash. In the sector globally, we think RIM, Motorola and Palm offer more compelling fundamental stories. ###
From the Nokia section of the Credit Suisee ‘Smart phones….smarter investments’ report (via Schwab) ...
>> Nokia – risks to value share are high, but likely to remain dominant in coming years. Surprisingly, Nokia ranks second in the Credit Suisse scorecard with a score of 75%, which is modestly behind the number one player Apple. This, if nothing, else tells us that Nokia position remains vulnerable. Simply put, we are concerned that even two years after the launch of Ovi, Nokia’s services strategy is still in a state of flux. Furthermore, Symbian while improving remains a software platform that still lacks the quality or the look and feel of several competing devices. The good news is that the smartphone industry will scale in size to materially lower price points, for example we see some 72% of smartphone units being sold at a sub-$250 price point by 2015. In this regard, some of Nokia’s other virtues will come to the fore such as scale, distribution, IPR and chipset efficiency. We conclude that these factors on balance even out on the long term and hence we expect Nokia’s smartphone share to stabilize at ~35% in 2010.
Margin leverage limited given smartphone issues. We estimate smartphones to account for 51% of Nokia’s devices gross profits in 2009. Here we believe Nokia’s smartphone share of 45% in Q209 is unsustainable despite recent stability and upcoming product launches, given competitive pressures from RIM, Apple and a slew of new Android-based devices. This means that despite robust smartphone market growth, Nokia will not benefit much operationally. Specifically, we expect Nokia to lose significant share in WE and CEMEA with its global smartphone share falling to 35% in 2010. Lower smartphone share and a relatively weak portfolio prevent a significant margin recovery in Devices and we now assume OMs of 11.4%/11% in 2009/2010 in Devices & Services business. Valuation – inexpensive, but… On our new 2010 estimates, Nokia trades on a P/E (excash) of 12x. However, given limited earnings growth in 2009-2010, we fail to see meaningful upside to shares over the next 12 months. Hence, we lower our rating to Underperform and our TP to €€ 8.5, based on 12x our 2010 EPS estimate plus €€ 0.35 per share of cash. ###
- Eric - |
