Earnings Preview: Nokia

Nokia Corporation (NOK), the world’s largest mobile phone maker, is slated to release its first quarter 2010 results on Thursday, April 21, before the opening bell. The current Zacks Consensus Estimate for the fourth quarter is pegged at 13 cents, representing an annualized growth of -30.62%.

With respect to earnings surprises over the trailing four quarters, Nokia has outperformed the Zacks Consensus Estimate in all three quarters except one quarter where the earnings per share (EPS) missed the Zacks Consensus Estimate by a penny. The average earnings surprise was a positive 20.38% over the last four quarters.

Fourth Quarter Recap

On January 27, 2011, Qualcomm reported its fourth quarter 2010 financial results. Quarterly net income on a GAAP basis was $1,009 million or 27 cents per share compared with a net income of $1,200 million or 35 cents per share in the year-ago quarter. Adjusted EPS of 30 cents exceeded the Zacks Consensus Estimate of 25 cents.

Total revenue was $17,206 million, up 6% year over year and was also above the Zacks Consensus Estimate of $16,864 million. The growth in revenue was primarily driven by higher sales from the NAVTEQ segment.

Agreement of Estimate Revisions

In the last 30 days, out of the 22 analysts covering the stock, 2 analysts decreased their EPS estimates for the first quarter of 2011 while none increased their estimates. Similarly, for the second quarter of 2011, out of the 21 analysts covering the stock, 7 analysts slashed their EPS estimate but none increased it.

For fiscal 2011, in the last 30 days, out of the 29 analysts covering the stock, 1 analyst increased its EPS estimate but 8 analysts moved downward. Likewise, for fiscal 2012, out of the 21 analysts covering the stock, 3 analysts increased their EPS estimates while 5 slashed their EPS estimates.

In synergy with the reduction in estimates we believe that the analysts are doubtful about Nokia’s future despite their recent tie-ups with Microsoft Corporation (MSFT). Lack of blockbuster products, back-dated operating system and poor position in US market will act as negative catalysts for growth in the long run.

Magnitude of Estimate Revisions

During the last 30 days, the Zacks Consensus Estimate was in line with the current estimates of 13 cents for the ongoing quarter of 2011 but for the second quarter of 2011, it is a penny belowthe current estimate of 16 cents.Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate is 3 cents and 5 cents below the current estimate of 73 cents and 77 cents, respectively.

Earning Surprises

In the previous quarter, Nokia reported EPS of 30 cents, which beat the Zacks Consensus Estimate by 5 cents. There is no surprise expected for the ongoing quarter but for the upcoming quarter, it is reflecting a 13.33% downside potential (essentially a proxy for future earning surprises). Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate downside potentials are 12.86% and 11.69%, respectively.

Our Recommendation

Nokia faces stiff competition from Google Inc’s (GOOG) Android-based smartphones and Apple Inc’s (AAPL) iPhones. Moreover, with the popularity of tablets, which Nokia lacks in their product portfolio, will hurt profitability in the long run.

However, we remain cautiously optimistic regarding Nokia’s recent decision to adopt Microsoft‘s Windows 7 software as their smartphone operating system.

We, thus, maintain our long-term Neutral recommendation for Nokia. Currently, Nokia has a Zacks#3 Rank, implying a short-term Hold rating on the stock.

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