NOK: Financial Gauge Analysis for the September 2010 Quarter

Nokia Corp. (NYSE: NOK and HEL:NOK1V) earned €0.14 per diluted share on an IFRS basis in the September-ending third quarter of 2010, up from a loss of €0.15 per share in the same quarter of 2009. 

The loss in the year-earlier quarter was primarily the result of Nokia writing off €900 million of intangible assets.

A previous article examined in some detail Nokia's Income Statement for the September quarter.  Reported earnings doubled the €0.07 per share we had forecast.

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.  This post reports on the metrics for Nokia and the associated financial gauge scores.  The metrics were calculated using data from Nokia's current and historical financial statements.

Before getting into the details, we will take one step back to introduce the subject of today's analysis.

A Finnish company with a rich history, Nokia Corporation has been the leading global producer of mobile phones since 1998.  The company also sells the network infrastructure that supports these phones. 

Nokia's annual profit fell from €4.0 billion in 2008 to €891 million in 2009.  Net Sales dropped from €50.7 billion in 2008 to €41.0 billion in 2009. 

Global economic weakness certainly had a negative effect.  However, Nokia's most visible problem has been its inability to stem the success of Apple's (NASDAQ: AAPL) iPhone, which was first introduced in 2007.  The Blackberry product line sold by Research in Motion (NASDAQ: RIMM) and, more recently, smartphones based on the Android architecture promoted by Google (NASDAQ: GOOG) have also become popular at Nokia's expense. 

In the latest and most dramatic attempt to regain its competitive position, Nokia announced on 10 September 2010 that it would replace its Chief Executive Officer with Mr. Steven Elop, formerly of Microsoft (NASDAQ: MSFT). 

Additional background information about Nokia and the business environment in which it is currently operating can be found in the look-ahead.

In summary, Nokia's latest quarterly results produced the following changes to the gauge scores:

• Cash Management: 19 of 25 (unchanged for June)
• Growth: 17 of 25 (up from 5)
• Profitability: 13 of 25 (up from 10)
• Value: 13 of 25 (unchanged)

• Overall: 58 of 100 (up from 49)

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.  Readers are encouraged to verify these figures and calculate others as they see fit.

Cash Management	30 Sep 2010	30 Jun 2010	30 Sep 2009	5-yr Avg
Current Ratio	1.5	1.5	1.5	1.6
LTD to Equity	28.5%	27.7%	32.0%	9.6%
Debt/CFO (years)	1.5	1.3	3.8	0.8
Inventory/CGS (days)	27.4	26.3	31.0	26.9
Finished Goods/Inventory	N/A	N/A	N/A	N/A
Days of Sales Outstanding (days)	67.7	71.3	80.8	63.3
Working Capital/Revenue	19.6%	18.6%	12.7%	17.8%
Cash Conversion Cycle Time (days)	29.8	31.4	39.0	30.6
Gauge Score (0 to 25)	19	19	5	10

The changes in the Cash Management metrics were generally minor in the third quarter, resulting in a steady gauge score.

Nokia issued much more long-term debt in late 2008 and early 2009 that it had previously.  However, the debt, now about €4.3 billion has not changed much over the last year.  At less than 30 percent of shareholders' equity, the debt level does not seem excessive.  The combination of long-term and short-term debt only amounts to about 18 months of the company's cash flow. 

The company holds more cash and other liquid investments that it has debt.  The debt might help Nokia manage cash flows across numerous currencies.

Nokia has made progress paring its inventory, when measured in terms of days of Cost of Good Sold.  The inventory by this reckoning is about 10 percent leaner than last year, although it is one day greater than last quarter.

Significant drops from last year in the Days of Sales Outstanding and the related Cash Conversion Cycle Time both signal improved cash efficiency.

Growth	30 Sep 2010	30 Jun 2010	30 Sep 2009	5-yr Avg
Revenue Growth	0.3%	-6.3%	-22.5%	1.3%
Revenue/Assets	115.1%	110.2%	110.1%	144.2%
Operating Profit Growth	-44.6%	-32.0%	-3.4%	-21.0%
CFO Growth	174.1%	110.1%	-77.3%	19.9%
Net Income Growth	295.6%	-55.4%	-90.1%	1.8%
Gauge Score (0 to 25)	17	5	0	10

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

The Growth gauge soared because the trailing-year Net Income and Cash Flow growth rates shot up.

The catch is that recent results appeared stellar mostly because they faced easy comparisons.  Earlier results were depressed by special charges.  For example, the third quarter of 2009 included a staggering €908 million intangible-asset impairment charge related to Nokia Siemens Networks. 

The trailing-year Revenue growth rate turned positive, helped by 5 percent more Revenue in the September 2010 quarter than in the year-earlier period.

The Revenue/Assets ratio took a small, but welcome, step up after a lengthy decline.  This reversal had an outsize effect on the Growth gauge score.

Profitability	30 Sep 2010	30 Jun 2010	30 Sep 2009	5-yr Avg
Operating Expense/Revenue	94.6%	94.2%	95.7%	90.3%
ROIC	15.0%	4.0%	8.7%	58.1%
Free Cash Flow/Invested Capital	29.4%	29.6%	6.5%	61.0%
Accrual Ratio	2.9%	-2.0%	3.1%	1.3%
Gauge Score (0 to 25)	13	10	4	12

Although some of Nokia's profitability ratios are significantly below their long-term averages, improvements in the last year allowed the Profitability gauge to tack on a few points and achieve a mid-range result.

We had earlier mentioned the substantial decline in the Return on Invested Capital, which had sagged under the weight of weak performance and special charges.  The ROIC ratio has now taken a small step up, although it remains far below its previously lofty levels.

The Cash Flow figures have been more robust than earnings-driven results.

Value	30 Sep 2010	30 Jun 2010	30 Sep 2009	5-yr Avg
P/E	18.1	31.3	104.4	23.9
P/E vs. S&P 500 P/E	1.2	2.2	4.7	1.4
PEG	N/A	N/A	N/A	2.0
Price/Sales	0.9	0.7	1.3	1.8
Enterprise Value/Cash Flow (EV/CFO)	8.4	6.2	36.9	19.0
Gauge Score (0 to 25)	13	13	7	8
Share Price ($)	$10.03	$8.15	$14.62	-

Even though the price of Nokia ADRs had a significant move up in the third quarter, the Value gauge was able to hold onto its modest 13-point score. 

The Price/Sales and EV/CFO ratios are half or less than their long-term averages.  This helps the Value gauge score considerably.

The earnings-related multiples, inflated by special charges, are starting to look more reasonable.

Overall	30 Sep 2010	30 Jun 2010	30 Sep 2009	5-yr Avg
Gauge Score (0 to 100)	58	49	20	39

The long-suffering Growth gauge was the star of the third quarter, rising from 5 to 17 of the 25 possible points.  This increase helped the Overall Gauge add nine points and approach attractive territory.

A key factor underlying the Growth gauge's resurgence was easier comparisons with results from 2009.  Special charges have migrated from the recent four-quarter window to the one before.  The test ahead will be whether the company can sustain the nascent momentum.







Full disclosure: Long NOK at time of writing.