Earnings Preview: Nokia

Nokia Corporation (NOK), the world’s largest mobile phone maker, is slated to release its second quarter 2011 results on Thursday, July 21, before the opening bell. The current Zacks Consensus Estimate for the second quarter is pegged at 2 cents, representing an annualized negative growth of 83.85%.

With respect to earnings surprises over the trailing four quarters, Nokia has outperformed the Zacks Consensus Estimate in all the four quarters. The average earnings surprise was a positive 32.31%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.

First Quarter Recap

On April 21, 2011, Nokia reported its first quarter 2011 financial results. Quarterly net income was approximately $470 million or 13 cents per share compared with $477 million or 13 cents per share in the prior-year quarter. Adjusted (excluding special items) EPS of 17 cents surpassed the Zacks Consensus Estimate of 13 cents.

Quarterly net revenue was approximately $14,214 million, up 9% year over year and comprehensively beat the Zacks Consensus Estimate of $13,751 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 23 analysts covering the stock, 1 analyst decreased the EPS estimates for the second and third quarter of 2011, respectively, while none increased their estimates.

For fiscal 2011, in the last 30 days, out of the 28 analysts covering the stock, 2 analysts increased their EPS estimates while 1 analyst moved downward. For fiscal 2012, out of the 26 analysts covering the stock, 1 analyst increased the EPS estimate while 2 moved in the opposite direction.

Magnitude of Estimate Revisions

During the last 30 days, the Zacks Consensus Estimate was in line with the current estimate of 2 cents for the ongoing quarter of 2011 but for the second quarter of 2011, it is a penny above the current estimate of 1 cent.Similarly, for fiscal 2011 and 2012 the current estimates are pegged at 30 and 42 cents, respectively and are a penny short of the Zacks Consensus Estimate.

Earning Surprises

In the previous quarter, Nokia reported EPS of 17 cents, which beat the Zacks Consensus Estimate by 4 cents. There is no surprise expected for the ongoing quarter but for the upcoming quarter, it represents a 100.00% downside potential (essentially a proxy for future earning surprises). Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate downside potentials are 3.33% and 19.05%, respectively.

Our Recommendation

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

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

We, thus, maintain our long-term Neutral recommendation for Nokia. Currently, Nokia has a Zacks#4 Rank, implying a short-term Sell rating on the stock.

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