Should You Buy Nokia Oyj (ADR) (NOK) Stock? 3 Pros, 3 Cons

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Nokia Oyj (ADR) (NYSE:NOK) has got its swagger back. Between 2014 and late last year, NOK stock traded relentlessly to the downside. By the time the stock reached bottom, it had lost half its value. However, 2017 has brought a reversal in fortunes. The recent earnings report accelerated the reversal, as NOK stock sprinted 20% higher in recent days and reached a new 52-week high on Tuesday.

NOK Stock: Should You Buy Nokia Oyj (ADR) (NOK) Stock? 3 Pros, 3 Cons

Bulls have gotten excited since, as Chris Lau wrote recently, this quarter was enough to demonstrate that management’s turnaround plan is working. However, the quarter didn’t deliver on all counts. Revenues didn’t match expectations, and the company’s network division seemingly underperformed.

Still, it’s hard to deny the company’s momentum. Its operational strategy appears to be working. But will it be enough to carry NOK stock up even farther?

NOK Stock Cons

Core Network Business Slowing: Nokia has transformed itself into quite a diversified operation. That’s good news for NOK stock owners, since the company’s legacy operations are struggling. The network business saw sales slide 6%. Telecom operators are in a soft part of their cycle; largely done rolling out current technology, but not yet ready for the leap to 5G.

Tim Long, of BMO Capital, recently warned about telecom spending for the year. He specifically highlighted concerns out of China, where three of the major carriers appear to be cutting spending. Long noted that China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU), for example, spent 72 billion Chinese yuan on capex last year, but is planning only 45 billion this year. That’s a massive drop-off. And companies like Nokia take the brunt of the blow; Long estimates that Nokia generates 10% of its revenues from China.

Weak Profitability: While NOK stock has turned the corner, it may be too early to say the same about the business. The company has lost money four out of the past six fiscal years. Nokia returned to profitability in 2014 and 2015, but that quickly gave way to more red ink. The company has now shown negative earnings five of the past six quarters.

Nokia just eliminated more jobs in Finland last week, with the company’s regional manager stating that: “In order to succeed in this market environment we must continue to streamline our cost structure and increasing efficiency.” That’s not the sort of language you expect to hear from companies who are on a roll. Yes, NOK stock is going up, but the income statement doesn’t yet reflect improving investor enthusiasm.

Erratic Dividend: As might be expected, NOK stock is not a star dividend performer. However, last year, Nokia paid a much larger dividend of 29 cents per share to reflect previous profitability. Given that NOK stock averaged around $5 per share last year, that worked out to an almost 6% year. NOK stock attracted some dividend yield hunters who thought they had found an unheralded income source.

However, one month from now, many of these yield players are likely to wind up disappointed. Nokia has cut the dividend for this year from 29 cents to 18 cents. That amounts to a much more pedestrian 2.9% dividend yield at today’s stock price. Don’t be surprised to see some short-term weakness in NOK stock following the annual dividend, which is expected to be paid June 9, as investors adjust their yield calculations downward.

NOK Stock Pros

Outperforming Ericsson: According to Morgan Stanley’s Francois Meunier, Nokia is winning in one pivotal battle. It is outperforming chief rival Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) within its core business.

Meunier draws this conclusion by noting that Nokia managed to achieve flat margins in 2016 despite a substantial drop-off in volume. Ericsson, by contrast, was not able to. Meunier suggests that this demonstrates that customers prefer Nokia’s current product line-up. While a telecom sector slowdown is unavoidable, Nokia has positioned itself well to ride out the tough spot and catch the rebound once the cycle turns.

New Phone Launches: Nokia phones appeared to be gone from the marketplace. The former flip phone titan lost its way in the switchover to smartphones, as Apple Inc. (NASDAQ:AAPL) and other newcomers left Nokia in the dust.

However, Nokia phones are back. The company has licensed the brand to a new startup called HMD Global. Current and former Nokia executives are deeply involved in HMD, and should give the Nokia brand a decent chance at a revival. Nokia unveiled two concepts to a packed crowd at the Mobile World Congress earlier this year. These include a low-end phone with a startling 22 hours of talk-time, and a higher-end swift Android smartphone. While it’s too early to say if these will drive any meaningful profits for Nokia, it’s nice to see making an effort to revitalize a formerly powerful brand.

Mexican Contract Win: While telecom is slow at the moment, Nokia is still winning contracts. In fact, Nokia just scored its largest-ever Latin American deal. A new Mexican firm, Altan Redes, will be building out a nationwide LTE network as part of a government-backed public-private partnership and is working with Nokia.

All told, Altan Redes expects to invest nearly $7 billion in its network. It will subsequently rent the finished product out to Mexican telecom firms, such as America Movil SAB de CV (ADR) (NYSE:AMX) or the Mexican operating division of AT&T Inc. (NYSE:T). Given the quality end customers and Mexican government’s involvement, this large-budget project should advance swiftly, adding a sizable project to Nokia’s backlog.

Verdict

Nokia stock is by no means a terrible choice, but it’s hard to see why investors are this excited. Yes, last quarter’s earnings were somewhat better than expected. However, real problems remain in the core business. Telecom spending is starting to level off, but for now the trend is still downward. In response, Nokia is cutting costs and maintaining a defensive posture. That’d be fine if the stock were still at $5. However at $6.20, a new 52-week high, you need a better forward outlook to get bullish on the stock.

At the time of this writing, Ian Bezek held no position in any of the aforementioned stocks. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/buy-nokia-oyj-adr-nok-stock-pros-cons/.

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