17 July 2009

NOK 2009-2Q Gauges

In our last post, we examined Nokia's (NYSE: NOK) Income Statement for the second quarter of 2009 and compared the figures to our "look-ahead" estimates.

We have since used Nokia's latest financial statements to update the ratios and other metrics with which we assess Cash Management, Growth, Profitability and Value.  This post reports on our analysis results, including the Financial Gauge scores.

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

Nokia's latest quarterly results has produced the following changes to the gauge scores:

  • Overall: 28 of 100 (down from 45)

Readers should be aware that Nokia's financial statements are prepared in accordance withInternational Financial Reporting Standards (IFRS), rather than U.S. Generally Accepted Accounting Principles (GAAP).  The Euro (€) is the currency used in these statements.  Also, Nokia isn't required to file 10-Q and 10-K reports with the SEC.

The rest of this post reviews the financial metrics that determine the gauge scores.

Cash Management June 2009 March 2009 June 20085-yr Avg
Current Ratio 1.4 1.3 1.41.7
LTD/Equity 31.9% 21.4% 1.4%2.2%
Debt/CFO (years) 2.9 2.3 0.20.3
Inventory/CGS (days) 29.3 29.4 28.025.7
Finished Goods/Inventory N/A N/A N/AN/A
Days of Sales Outstanding (days) 82.0 74.7 66.057.3
Working Capital/Invested Capital 51.6% 47.4% 138.5%265%
Cash Conversion Cycle Time (days) 40.2 40.6 33.927.9
Gauge Score (0 to 25) 4 4 510

The first thing we notice in the Cash Management data is Nokia's soaring debt.  Long-term debt increased from 1.4 percent of Equity to 31.9 percent in the last year, and it now would take 2.9 years of Cash Flow from Operations to pay off the company's Debt.  LTD increased from €169 million to €4.08 billion.  The second item that catches our eye is the surge in Days of Sales Outstanding, which indicates that Accounts Receivables have increased from 66 to 82 days of Revenue.  The amount of Accounts Receivable has been reduced, but Revenue is down much more proportionately.  The DSO surge might also signify Nokia is offering more generous payment terms to its customers.

The greater number of days of Inventory on hand, as a percentage of Cost of Goods Sold, is probably symptomatic of the soft sales environment. Inventory tends to accumulate when customers are buying less.  We find it useful for many companies to track the Finished Goods proportion of Inventory, but Nokia does not disclose this information.

Growth June 2009 March 2009 June 20085-Yr Avg
Revenue growth -19.0% -12.1% 23.0%10.1%
Revenue/Assets 124.1% 125.1% 166.9%156%
Operating Profit growth 7.6% 15.7% 34.0%10.1%
CFO growth -71.4% -61.2% 19.4%7.0%
Net Income growth -66.4% -61.3% 2.0%5.4%
Gauge Score (0 to 25) 1 2 911
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 trailing-year Growth figures are all dismal.  The Operating Profit metric is a four-year average that should not change greatly from quarter to quarter; its plunge reflects the steepness of the current decline.

We should note, as a silver lining, Nokia's Net Income and Cash Flow remain positive.  The values are a small fraction of what they were last year, but they are greater than zero.

Profitability June 2009 March 2009 June 20085-Yr Avg
Operating Expenses/Revenue 93.5% 91.4% 85.9%88.2%
ROIC 28.6% 37.0% 112.7%101%
Free Cash Flow/Invested Capital 14.4% 20.9% 120.9%102%
Accrual Ratio 13.5% 10.2% -3.6%-0.3%
Gauge Score (0 to 25) 10 11 1815

To some extent, the rising level of Operating Expenses, relative to Revenue, is due to non-recurring charges.  We also have to acknowledge that it would be unrealistic to expect Nokia to slash Operating Expenses immediately in response to the sudden drop in Revenue.  An information technology has to keep investing in innovation during cyclical downturns if it is to be ready for the future recovery.

The rising Accrual Ratio suggests poorer earnings quality.  There is less Cash Flow underlying the scanty net income.

Value June 2009 March 2009 June 20085-Yr Avg
P/E 25.0 15.0 16.219.7
P/E vs. S&P 500 P/E 1.1 0.8 0.91.1
PEG 3.3 1.0 0.53.7
Price/Revenue 1.2 0.9 1.72.1
Enterprise Value/Cash Flow (EV/CFO) 26.7 15.2 12.518.3
Gauge Score (0 to 25) 8 17 156

The price of Nokia ADRs on 30 June 2009 was 40 percent less than on 30 June 2008.  The decline had been steeper through March, but the price actually rebounded 25 percent during in the second quarter.  While a lower share price would normally add lift to the Value gauge, the lift doesn't take effect when earnings and Cash Flow from Operations (see above) have plunged by greater amounts.  The Value gauge hits an air pocket when this happens.

Nokia's valuation ratios can be compared with other companies in the Communications Equipment industry.

Overall Jun 2009 Mar 2009 Jun 20085-Yr Avg
Gauge Score (0 to 100) 28 45 5440

We incorrectly thought the gauge scores of Nokia were stabilizing after the first quarter of 2009; however, a disappointing second quarter (at the same time the price of Nokia ADRs was surging), took another big bite of the scores.

None of the four category-specific gauges have a score over 10 point (25 is the maximum for these gauges), and one of the four, Growth, is scraping the bottom.  The Overall gauge reflects this weakness.

Full disclosure: Long NOK at time of writing.

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