Heavily shorted Nokia suspends dividend, lowers guidance--anybody surprised shares are down?

01/24/2013 2:42 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Investors weren’t happy to be reminded of how long a slog Nokia (NOK) still faces. The company reported earnings of 0.06 euros this morning, before the open in New York. That was a euro cent above Wall Street estimates. Revenue fell 19.6% from the fourth quarter of 2011 to 8.04 billion euros. That was just below the consensus of 8.06 billion euros.

The big news, however was that the company was suspending its dividend for 2013 in order to conserve cash. (Dividends in 2012 came to 20 euro cents a share.) In the quarter Nokia’s cash position improved by 800 million euros to 4.36 billion euros on December 31.

Yes, indeed management thinks the company has a tremendous amount of work ahead of it.

In the quarter the company managed to scratch out a very tiny positive operating margin in its device business of 1.3% (if you include one-time royalty income. Otherwise the device business broke even.) In the fourth quarter Nokia shipped 15.9 million smart phones with 4.4 million of those being the company’s new Lumia phones, 2.2 million being Symbian legacy phones, and 9.3 million being low-priced Asha feature phones.

The biggest problem for Nokia remains its lack of traction in the U.S. market. The company sold 700,000 phones in North America during the fourth quarter (out of global sales of 4.4 million.) That was ahead of the 300,000 phones sold in North America in the third quarter, but lagged analyst hopes for sales of 1 million to 1.2 million. (For context Apple’s (AAPL) global shipments of iPhones totaled 47.8 million in the fourth quarter.)

What to do with your shares now?

Nokia was heavily shorted going into today’s quarterly earnings announcement. (The shares were down 7.76% as of 2 p.m. in New York.) The company’s very positive January 10 preannouncement set up the actual earnings release to be a disappointment, especially because the company also lowered guidance for the first quarter of 2013. (I expect many of the shorts to cover in the next few days so if you’re looking to sell you might want to wait a bit.)

If you’re swing trading this stock, I’d wait to see if it might pull back further as analysts work that lowered guidance into their estimates for the first quarter. And then I’d wait some more for the company to actually report a fairly gruesome first quarter. Nokia has told investors that it expects operating margins in the first quarter for its device business of between +2% and -6%. Cash burn in the quarter is likely to be enough to raise fears again about whether the company might run out of cash.

If you are just holding the stock, patiently, for Nokia’s long-term recovery, I think your patience is going to be tried over the next few months. The stock was up 77% from November 8 through the January 23 close and it would only be reasonable to expect the shares to give some of that back in the next couple of months. I still expect Nokia to reach my target price of $7.80 a share but the shares won’t reach it without a pullback and consolidation—especially with the company’s guidance for the first quarter of 2013 as background. (Nokia is a member of my 12-18 month Jubak’s Picks portfolio http://jubakpicks.com/

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Nokia as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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