Nokia: Near-term good news in the mobile network gear market but long-term struggles remain in handsets

07/01/2013 6:51 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Nokia (NOK) climbed 3.21% today. (Nokia is now up 25.7% from the April 19 low and 10.8% from May 31 as of the close on July 1.)

Apparently the markets really liked the news that Nokia will acquire Siemens’ (SI) 50% share of their joint venture Nokia Siemens Networks for 1.7 billion euros ($2.2 billion.) Nokia Siemens is the No. 3 maker of mobile telecom equipment in the world behind Ericsson (ERIC) and Huawei.

What does the deal bring to Nokia?

Some stability at a time when the former market leader in cell phones is struggling for relevancy. I think this quote from Pierre Ferragu at Sanford C. Bernstein sums up the Wall Street view: “With this transaction, Nokia buys itself a future, whatever happens in smartphones and feature phones.”

That may be overstating the case a bit: I think the market would be disappointed if Nokia had to exit the cell phone market and was reduced to the network equipment business.

But Nokia Siemens Networks hasn’t been a bad business recently even though the joint venture has generally been a drag on Nokia and Siemens since the two companies put it together in 2007. Nokia Siemens Networks gained market share in the overall mobile network equipment market in 2012 and in the faster growing market for high-speed networking that company took over the No. 2 slot in the third quarter of 2012.

And Nokia did get the 50% of the joint venture that it didn’t own at a lower price than some analysts had feared. Estimates for the value of the joint venture—and thus for the price that Nokia would have to pay—ranged as high as 5 billion euros instead of the 3.4 billion valuation set by the price of 1.7 billion for 50% of the company.

The deal is also relatively light on the burden that it puts on Nokia’s cash position, a major worry because the company needs to burn cash to buy time for its new Windows-based phones to gain market traction. Nokia will pay Siemens 1.2 billion euros in cash at the closing of the deal—financed by a bank loan. The remainder of the 1.7 billion euro price—500 million euros—is in the form of a secured loan from Siemens due a year after the deal closes.

Nokia’s future, of course, hangs on its ability to become a real third-player in the current iPhone/Android dual universe. Quarterly results are expected to be ugly in the feature phone segment where cheap Android phones continue to eat into Nokia’s market share. A key to the second quarter, though, will be sales of the new Lumia 925 smartphone. Right now analysts are divided between those expecting a disappointing quarter and those looking for confirmation of momentum for the Lumia line in the first quarter. The new Asha line of feature phones won’t have much impact on the quarter since they only started to ship in May. For the fall Nokia has a new high end Windows smartphone in the Lumia series ready to launch in the United States. Nokia is hoping that its PureView camera technology and the phone’s 41-megapixel camera will serve as significant differentiators in a market crowded with good phones.

Nokia is scheduled to announce second quarter earnings on July 18. At that time I’ll revisit my target price for Nokia in my Jubak’s Picks portfolio http://jubakpicks.com/ . I think the company is showing a new aggressiveness in rolling out models up and down its product line that, in the short-term gives the stock a strong chance to move higher. In my May 3 revision of my long-term Jubak Picks 50 portfolio http://jubakpicks.com// , however, I dropped Nokia from the list. I just don’t see the company recovering its top of the market position against Apple (AAPL) and Samsung. So own this for a recovery from the company’s near-death experience but not for the long term. (I’m using this post as bookkeeping to make the sell on the portfolio page that I announced on May 3 http://jubakpicks.com/2013/05/03/10-long-term-picks-in-a-short-term-market/.)

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Apple as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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