Nokia Updates: Ratings Downgrade, New Phones Unlikely to Spur Recovery

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Things have not been going smoothly for Nokia (NYSE:NOK) the last few weeks. Last week, Nokia unveiled a cheaper smartphone based on Microsoft’s (NASDAQ:MSFT) Windows Phone operating system, which is intended to appeal to more cost conscious users, but we feel does not go far enough with a lower price point. In our earlier note titled Nokia Seeks to Gain Market Share at Android’s Expense, we concluded that Nokia should have come out with a lower smartphone price as a number of low-cost Google (NASDAQ:GOOG) Android vendors such as Huawei and ZTE sell smartphones in $100 range.

Last Friday, Standard and Poor’s announced that it had cut Nokia’s debt rating to the lowest investment ranking; from BBB to BBB- with a negative outlook. [1] This is another blow to Nokia, which has been looking for a revival after seeing its Symbian operating system lose customer appeal and its market share decline. Our $6.50 price estimate for Nokia stock is about 25% above the current market price.

See our complete analysis of Nokia here

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Nokia’s struggles continues

Although Nokia tasted some success with the launch of Lumia line of smartphones based on Windows Phone OS last quarter, it was not enough for the company to make a comeback in the smartphone market. Nokia’s global smartphone market share declined from 33% in 2010 to 16% in 2011, while Samsung’s increased from 8% to 20%, and Apple’s (NASDAQ:AAPL) increased from 16% to 19% during the same period. [2]

Rating cut another blow to Nokia

S&P’s debt rating cut of Nokia was influenced by the continued deterioration of the company’s operating margins. To put the numbers in perspective, Nokia’s operating margins have declined rapidly from around 20% in 2007 to 7% in 2011 as shown in the above chart.

We don’t expect any improvements in the company’s operating margins going forward; however, if the company manages to make a turnaround through its Lumia line of smartphones, its operating margins could improve and help lift its credit rating.

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Notes:
  1. Nokia Cut to One Step Above Junk by Standard & Poor’s on Profit Outlook, Bloomberg, March 2nd, 2012 []
  2. Apple Becomes World’s Largest Smartphone Vendor in Q4 2011, Strategy Analytics, January 26th, 2012 []