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Is There Treasure Hidden in Nokia’s Pile of ‘Junk’?

Richard Saintvilus|Contributor
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Upon learning early this morning that the debt rating of phone giant Nokia has been cut below investment grade by Fitch to BB+, it further affirms what I have described as the biggest “head-scratcher” on the stock market. The stock continues to be one of a handful to companies that I just can’t seem to come to terms with.

Remarkably, on one hand I appreciate the turnaround story that it can yet become by virtue of its partnership with software giant Microsoft. However, on the other hand, the reality is that, in Nokia, we have a market leader that is grossly irrelevant in its own fast-growing industry. It is a wonder that we are still (even today) discussing the survivability of a company that has lost almost 80 percent of its value over the past five years and continues to burn through cash like nobody’s business.

Be that as it may, as “feel good” stories go, I remain captivated to see if it can complete this turnaround that it has started. It goes without saying this will be no small accomplishment if smartphone leaders in Apple and Google have any say in the matter. It is interesting that Nokia has partnered up with Microsoft — a company, although successful in its own right, is often punished by analysts for not being Apple. Nokia, (fairly or unfairly) is now being treated the same. But this is where investors often lose track of what exactly presents value.

Nokia is never going to be Apple, let’s get that out of the way. But that does not imply that it can’t be successful. What Wall Street needs to see is that the company is still able to design and produce phones that consumers will buy. From that standpoint, its measure of success does not have to be based on the unrealistic views of how it compares to Apple, but rather on the more realistic assumption that it can secure enough share to leave behind the lesser names such as Research In Motion, HTC, and Samsung. Disappointingly, during its first-quarter announcement, not only did Nokia report less-than-stellar results, but its vision for what lies ahead suggests that things might only get worse.

The Grim Reality

The first-quarter earnings announcement was a revelation of just how dire the situation is for Nokia. The company announced a loss of 1.34 billion euros which translates to a loss of $1.7 billion in U.S. currency. Compared to the same period of a year ago, it has suffered a decline in smartphone sales of 52 percent.

More than anything else, this was an area of concern, as I anticipated that its Lumia line of phones based on the Windows platform would have been better received. But in the company’s defense, it is still early.

CEO Stephen Elop attributed the loss to greater-than-anticipated competition. This was a disappointing admission for a CEO to make. He didn’t mention any names, but given the fact that Apple and Google are ranked No. 1 and No. 2, respectively, in the smartphone market, I think it is safe to say that they were included in the reference. Elop also added the following:

“We're navigating through a significant company transition in an industry environment that continues to evolve and shift quickly. Over the last year we have made progress on our new strategy, but we have faced greater-than-expected competitive challenges. We are confident in our strategy and focused on responding urgently in the short term and creating value for our shareholders in the long term.”

Looking deeper into the numbers, the company logged what appear to be losses across the board. Net sales arrived at $9.65 billion, a number that is down from last year’s performance. The company sold 12 million smartphones, or 50 percent less than what it sold in the first quarter of 2011. As bad as these numbers were, however, the company warned that numbers for the coming quarter will be much worse than expected.

The company said its devices and services operating margin was going to be in negative territory, also suggesting it has limited near-term visibility in that area. So the question is, what are investors to do in this situation beyond the obvious choice of avoiding the stock entirely?

Bottom Line

As poorly as Nokia has performed over the past couple of years, bringing it to its current state — “junk” status, according to Fitch — its issues have been compounded by the fact that its rivals in Apple and Samsung have not made enough mistakes to present it with an opening ... or a glimmer of hope.

That said, I am more than willing to give the company quite a bit of respect for just staying alive. As fast as it has fallen — from having almost 50 percent of the global smartphone revenue in 2007 — Nokia is still relevant today in the overall phone category.

Investors willing to give the company more time may look to its survivability, as well as its Microsoft partnership. Maybe the company just might be successful at recycling itself. After all, you know what they say about “other people’s junk.”

Additional News: Fitch Downgrades Nokia to ‘Junk’

Additional Views: Is F5 Networks Still Overvalued?

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