logo
  Join        Login             Stock Quote

Nokia's Financial Strength In Rough Waters After Fitch Downgrade

 April 24, 2012 01:50 PM
 


(By Mani) First Moody's and now Fitch  have begun to lose confidence in the financial fundamentals of Nokia Corp. (NYSE: NOK). Fitch has downgraded Nokia's debt to junk status, following Moody's move to cut the Finnish mobile phone company's long term debt-grade by a notch to Baa3; just one step away from non-investment grade, indicating the vulnerability for its debt instruments rating to be junk.

Today, Fitch cut Nokia's Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'BB+' from 'BBB-'. The outlook on the long-term IDR is Negative, implying further downgrades are possible.

The ratings revision comes after Nokia's dismal first quarter results. Amid a customer shift to less expensive smartphones in the first quarter, Nokia reported a hefty loss of 929 million euros, weighed down by charges and a sharp decline in sales. In the year-ago period, Nokia reported a profit of 344 million euros.

[Related -Microsoft Corporation (MSFT): Little Choice But To Buy Nokia Corporation's (NOK) Devices & Services]

Quarterly revenue fell 30 percent to 7.4 billion euros. The mobile devices units dropped 24 percent to 83 million, which is comprised of 70.8 million mobile phones and 11.9 million smartphones. Devices & Services' revenues came in at $4.25 billion, a 40 percent decline from last year. Operating margins were negative 3.0 percent.

"The deterioration in the company's core Devices and Services division in Q1, together with the company guidance of -3% non-IFRS operating margins or below for the division for Q2 and the general lack of visibility beyond this point, means Nokia's profile is no longer commensurate with an investment grade rating," Fitch analyst Owen Fenton said in a statement.

[Related -Microsoft Corporation (MSFT): Did Microsoft Act Late Over Deal With Nokia Corporation (ADR)?]

The latest actions by the ratings agencies call into question the strength of Nokia's balance. As of the first quarter, Nokia has gross cash of 9.8 billion euros and a net cash position of 4.9 billion euros. Though this cash position looks comfortable at the outset, it could be drained over the next 18 months as Nokia could be recording substantial restructuring charges over job cuts.

Nokia is planning to cut costs by more than 1 billion euros in its Devices & Services unit for the full year 2013, compared to the full year 2010 operating expenses of 5.35 billion euros. Most of this cost savings is expected to come in the form of plant closures and job cuts, leading to hefty restructuring charges.

In addition, the 9.8 billion euros are about twice that of its reported debt at the close of the March quarter. However, the concern is that after more than 500 million euros was generated in the fourth quarter, it had consumed close to 700 million euros in the first quarter. The ratings agencies are concerned with the burn rate, and if the company struggles to maintain its cash and marketable securities, its balance sheet could land itself into a more mess.

Meanwhile, the potentially negative operating cash flow could persist unless the company's operating performance improves.

Fitch said Nokia needs to show substantial improvements in the second half of 2012 and 2013 to avoid further negative rating action.

The launch of the new Lumia phone with AT&T, and the potential launch of new Nokia products later in the year could be positive for Nokia's credit profile. Although Nokia is progressing on its Windows OS strategy, it has faced greater than expected competitive challenges as Symbian devices are falling off precipitously while Nokia is seeing stiff competition at the low-end from entry level Android devices.

Nokia's latest revelation shows that it is facing tough competition, even in emerging markets where consumer demand dynamics have shifted from feature phones to cheaper Android smartphones offered by Chinese vendors such as ZTE and Huawei. Those devices offer touch-screen, ablility to multitask and run apps at a cheaper rate compared to the normal feature phones from Nokia that run on the Series 40 or Symbian.

To affirm the rating at the 'BB+' level, Fitch noted that it believes Nokia needs to stabilize revenues and be capable of generating low-single digit non-IFRS operating profit margins and positive pre-dividend free cash flow.

"Given the potential headwinds facing the company, Fitch is currently not convinced that Nokia can attain this over the course of 18 months," Owen noted.

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageMedtronic, Inc. (NYSE:MDT) Q1 Earnings Preview: Trouble Brewing

Medtronic, Inc. (NYSE:MDT) will report financial results for the first quarter of its fiscal year 2015 on read on...

article imageMBIA Inc. (MBI) : BTI's $12 a Tough Task

MBIA Inc. (NYSE:MBI) is doing well on a day stocks are struggling The guarantee insurance company is the read on...

article imageUrban Outfitters, Inc. (URBN) Q2 Earnings Preview: A Snug Fit

Urban Outfitters, Inc. (NASDAQ:URBN) will hold a webcast to discuss its second quarter of fiscal-year 2015 read on...

article imageEstee Lauder Companies Inc. (EL) Q4 Earnings Preview: Options Player Betting On EL’s EPS Looking Pretty

Estee Lauder Companies Inc. (NYSE:EL) will release fiscal 2014 fourth quarter and full year financial read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.