Ailing Finnish handset manufacturer
Nokia Corporation
(
NOK
) continues its dismal run as Moody's Rating Agency has downgraded
it to "junk" status. We believe that the disappointing profit
outlook posted by the company, coupled with its
higher-than-expected cash outflow, are the primary reasons for the
pessimistic view.
Moody's has lowered Nokia's long-term credit rating to "Ba1"
from "Baa3" - the second ratings downgrade suffered by the company
in three months. Moody's is the third rating agency to reduce Nokia
to non-investment grade status following Fitch and Standard &
Poor's in April. Relegation to "junk" status implies that Nokia's
creditability is doubtful and the company will not be favored by
financial institutions.
Nokia is currently engulfed with problems and has been losing
market share to
Apple Inc.'s
(
AAPL
) iPhone and a gamut of smartphones that run on
Google Inc.'s
(
GOOG
) Android operating system. The company also faces stiff
competition in the low-end segment from Chinese manufacturer
ZTE.
According to IDC, once the world's largest handset manufacturer,
Nokia has recently been overtaken by Korean giant Samsung
Electronics in sales.
In an effort to improve its falling smartphone market share, the
company ditched its Symbian operating system and teamed up with
Microsoft Corporation
(
MSFT
) to develop Windows based smartphones. However, the recently
launched Lumia is not expected to be a hit right away, as the
company sold only 12 million handsets in the first quarter compared
to Apple's 35 million and Samsung's 44.5 million.
In order to withstand this problem, Nokia has initiated several
restructuring measures like retrenching 10,000 employees, shutting
down its production and research and development units as well as
divesting its 90% stake in its premium handset division Vertu.
Additionally, Nokia plans to trim its huge patent portfolio which
is being viewed as a desperate move to improve its fading cash
position.
Nokia is skeptical that the fierce competitive landscape could
negatively impact its device and service business. The company
expects its second quarter operating margin to be broader than
negative 3.0% in the first quarter. Furthermore, the company stated
that it might have to shell out more money, if the Nokia-Siemens
joint venture continues to escalate its operating cash flow.
Despite the comprehensive restructuring initiatives undertaken
by the cell phone maker, the above mentioned issues are believed to
be the primary reasons for Nokia's rating downslide.
Recommendation:
We retain our long-term Underperform recommendation on Nokia.
Currently, Nokia has a Zacks #3 Rank, implying a short-term Hold
rating.
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