From SSB....
--SUMMARY:--Nokia Corporation--Telecommunications Equipment * Nokia results due 4/27, before Open in NY. We believe the company can meet or beat EPS estimates of Euro 0.17 ($0.16) & consensus of $0.16 compared to Euro 0.13 ($0.14) last yr. U.S. ests based on Euro 1.0 = $0.97. * Revs should be up 62% to Euro 6.3 billion, driven by mobile phones (+82%) and wireless infrastructure (+33%). * Gross mgn & operating mgn should be 38.7% and 19.7%, respectively. * Sometime in 2000, the psychology on NOK to shift from successful mobile phone supplier to successful infrastructure player also as infrastructure orders accelerate due to 3G. * Could be some investor confusion due to strengthening USD vs. Euro which makes US-based EPS seem lower, BUT this is a cosmetic issue only. * We continue to rate NOK a 1-M with 12 month price target of $61. --EARNINGS PER SHARE-------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Actual 12/99 EPS $0.12A $13.00A $0.14A $0.17A $0.55A Previous 12/00 EPS $0.16E $0.17E $0.17E $0.21E $0.72E Current 12/00 EPS $0.16E $0.17E $0.17E $0.21E $0.72E Previous 12/01 EPS $N/A $N/A $N/A $N/A $0.93E Current 12/01 EPS $N/A $N/A $N/A $N/A $0.93E Previous 12/02 EPS $N/A $N/A $N/A $N/A $N/A Current 12/02 EPS $N/A $N/A $N/A $N/A $N/A Footnotes: --FUNDAMENTALS-------------------------------------------------------------- Current Rank........:1M Prior:No Change Price (04/20/00)....:$48.88 P/E Ratio 12/00.....:67.4x Target Price..:$61.00 Prior:245.00 P/E Ratio 12/01.....:52.2x Proj.5yr EPS Grth...:30.2% Return on Eqty 99...:40.0% Book Value/Shr(00)..:8.70 LT Debt-to-Capital(a)3.6% Dividend(00)........:$.47 Revenue (00)........:27492.00mil Yield...............:1.0% Shares Outstanding..:1191.2mil Convertible.........:No Mkt. Capitalization.:57773.2mil Hedge Clause(s).....: Comments............:(a) Data as of the most recently reported quarter. Comments............: --OPINION:------------------------------------------------------------------ SUMMARY PREVIEW: MEET OR BEAT ESTIMATES BUT FOCUS ON 3G While we expect first quarter results to be strong, the real focus is on 3G. Sometime in 2000, the psychology on Nokia should begin to shift from a successful phone supplier to a successful wireless infrastructure supplier as well as infrastructure orders begin to accelerate as the 3G licensee winners begin placing orders and building 3G networks. We estimate EPS should be Euro0.17 per share, up 58% from Euro0.11 last year. In U.S. dollars, earnings should be about $0.16, based on Euro1.0 = $0.97, compared with $0.12 a year ago, based on Euro1.0 = $1.09. This compares with consensus of about $0.16 in the United States. Revenues, in our opinion, should increase by 62% to Euro6.3 billion from Euro3.9 billion a year ago. Top-line growth should be driven by an increase of about 33% year over year for wireless infrastructure, and more than 82% year over year for mobile phones, areas in which Nokia is currently taking market share against its peers. Gross margin and operating margin should be 38.7% and 19.7%, respectively, compared with 39.8% and 19.8%, respectively, a year ago. THE DECLINE IN THE EURO RELATIVE TO THE U.S. DOLLAR COULD HAVE A "COSMETIC" IMPACT ON CURRENT AND FUTURE FINANCIAL RESULTS. The recent decline of the Euro from $1.01 in the December quarter to roughly $0.95 currently will not impact the earnings of the company since "it fully hedges its operating profits." BUT, it could have two "cosmetic" issues on how the company's results are viewed by investors. First. sales will look higher, but operating margins lower. Close to 40% of Nokia's sales are generated in U.S. dollars. Nokia hedges its operating income. Thus, the decline in the Euro will have a positive impact on sales generated by the company since its U.S. sales will be translated into more Euro's, while a corresponding hedging loss will be recognized above the operating line. While the operating income should be exactly as expected, cosmetically the company will be viewed as having had more margin pressure. Second, US analysts may be disappointed with Nokia's EPS if they are only focused on US dollar earnings. This has happened before and it took about a week's worth of confusion before the results were viewed as positive and the weakness a buying opportunity. Many analysts assume the last Euro conversion rate and apply it forward. While Nokia is on track to meet or beat our estimates in Euro terms, "cosmetically" future estimates may be viewed as declining because of the 6% decline in the Euro over the last quarter. INVESTMENT HIGHLIGHTS: Nokia's focused strategy in GSM wireless systems, combined with a broad portfolio in mobile handsets, should enable it to outpace its peers in exploiting the explosive demand for wireless equipment throughout the world. Additionally, we believe the company is well positioned to leverage the equipment opportunities in 3G, especially in Europe and Asia, over the next 12-24 months. Growth should be driven by an increase in the number of new wireless operators, an increasing subscriber base, the migration in the Americas to digital technology from analog, and the migration of minutes of use to the wireless network from wireline. We believe Nokia is best positioned to benefit from wireless opportunities, since the company derives more of its revenues from the wireless industry than its peers (i.e., about 70% versus 40% for Motorola, and less than 20% for Lucent and Nortel). We believe mobile phone revenues in the first quarter of 2000 should be up by more than 10% quarter to quarter as opposed to the normal seasonal decline of 10%-15%. We also believe that mobile phone margins for the first quarter of 2000 are unlikely to decline by as much as previously anticipated. INVESTMENT THESIS: BENEFICIARY OF STRONG WIRELESS INDUSTRY GROWTH We believe the outlook for the wireless marketplace is particularly robust as new competitors enter the market, driving down subscriber costs, which consequently stimulates subscriber growth. This trend, combined with continued strong demand for infrastructure, such as base stations and switches destined for mobile telephone switching offices, should drive outstanding sales and earnings growth for wireless equipment suppliers, setting the stage for outperformance by companies such as Nokia. We also believe that Nokia is poised to outperform, given that orders for mobile phones and infrastructure continue to accelerate. Nokia is now the No. 1 mobile phone supplier in the world and is well positioned to capitalize on the infrastructure opportunities for 3G in Europe and Asia. Moreover, industry demand for handsets remains very strong, especially in North and South America, Europe, and China. Demand for 1999 was estimated at more than 200 million at the end of 1998, while the actual number of units sold was 275 million. We believe Nokia can continue to gain market share, especially at the expense of the second-tier players, which account for about 40% of the marketplace. Nokia should be able to accomplish this feat based on its breadth of products and its large-scale manufacturing. In summary, we believe Nokia is well positioned for continued strong revenue and earnings growth because it 1) continues to add to its No. 1 position in the mobile phone market with the launch of new handsets in all technologies across all price levels; 2) exploits the increase in wireless infrastructure spending around the globe (especially in Europe, where Nokia holds significant market share); 3) has the ability to leverage its network-installed base for upcoming 3G equipment opportunities, and 4) benefits from deregulation of the European wireline markets, in which Nokia is a leading supplier to the new-operator segment. |
