18 October 2009

NOK: Financial Gauge Analysis for the September 2009 Quarter

In previous article, we examined Nokia's (NYSE: NOK) Income Statement for the third quarter of 2009 and compared the figures on each line to our "look-ahead" estimates.  Nokia wrote off €900 million of intangible assets during the quarter, which resulted in a loss of €0.15 per share.

Using the financial statements in Nokia's earnings announcement [pdf], we have now updated a set of Cash Management, Growth, Profitability and Value metrics.  This post reports on the metrics and the associated 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.  We can update this description with news that the U.S. International Trade Commission on 16 October affirmed an earlier decision that "Nokia products do not infringe InterDigital's [NASDAQ: IDCC] patents."  Coincidentally, on the same day, Nokia announced that its Chief Financial Officer will take over management of the company's Mobile Phones division and the current global sales boss will switch to the CFO position.

We recommend this recent article in the NY Times on what Nokia is doing to improve its weak sales in the U.S.

Getting back to the business at hand, Nokia's latest quarterly results has produced the following changes to the gauge scores:

  • Overall: 23 of 100 (down from 29)
U.S. readers should be aware that the Euro (€) is the currency used in Nokia's financial statements, which are prepared in accordance with International Financial Reporting Standards (IFRS).  Also, Nokia isn't required to file 10-Q and 10-K reports with the SEC.

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash ManagementSep 2009Jun 2009Sep 20085-yr Avg
Current Ratio1.
Debt/CFO (years)
Inventory/CGS (days)33.929.332.226.0
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)83.482.069.758.8
Working Capital/Invested Capital71.7%51.6%30.2%234.7%
Cash Conversion Cycle Time (days)40.640.234.828.9
Gauge Score (0 to 25)74310

Nokia is much more indebted than it was last year.  Long-term debt increased from €174 million in September 2008 (1.4 percent of Equity at the time) to €4.45 billion now (31.9 percent of current Equity).  Instead of about 8 months of Cash Flow from Operations, it would now take 3.8 years of Cash Flow to pay off the short-term and long-term debt.  The debt load is not necessarily excessive, but the investors should be aware that Nokia's capital structure has changed dramatically.

Some of the debt is bolstering the company's Working Capital, which helped its gauge score.

Another item deserving attention is the Days of Sales Outstanding.  Accounts Receivables have increased from 70 to 83 days of Revenue, which is substantially above Nokia's long-term average for this metric.  The Accounts Receivable figure on the Balance Sheet is lower that it was last year, but Revenue is down by a greater percentage.  Increasing DSO durations can be a signal that the company has to offer 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 also symptomatic of the weak sales environment.  Inventory tends to accumulate when customers are buying fewer products.  Nokia does not disclose the composition of the Inventory.

GrowthSep 2009Jun 2009Sep 20085-yr Avg
Revenue growth-22.5%-19.0%14.3%7.8%
Operating Profit growth-2.4%5.4%31.0%4.1%
CFO growth-77.3%-71.4%-9.0%4.7%
Net Income growthN/A-66.4%-17.6%-2.7%
Gauge Score (0 to 25)01311
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.

Revenue, Cash Flow from Operations, and Net Income are all much, much lower in the last four quarters than in the four prior quarters.  Net Income was certainly hurt by the staggering €908 million intangible-asset impairment charge related to Nokia Siemens Networks. 

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.

A positive is that Cash Flow remains positive.  In the last three quarters, Cash Flow from Operations totaled €1.7 billion.

ProfitabilitySep 2009Jun 2009Sep 20085-yr Avg
Operating Expenses/Revenue95.7%93.5%86.1%88.7%
Free Cash Flow/Invested Capital7.8%14.4%69.7%98.9%
Accrual Ratio3.1%13.5%2.6%0.7%
Score (0 to 25)4101414

It's clear from the table that Nokia has become much less profitable as Revenue has plunged.  Nokia has to keep investing in research and development during a cyclical downturns if it wishes to profit during the recovery phase.

ValueSep 2009Jun 2009Sep 20085-yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)37.026.710.720.7
Score (0 to 25)79216

When the third quarter ended, Nokia's price per ADR was $14.62, less than a nickel higher than at the end of the preceding quarter.   The price had run up a rather surprising 25 percent during the second quarter.

The Value gauge is indicating that the price wasn't justified by the operating results.  To a certain extent, the one-day loss of 11 percent in the ADR price after third-quarter results were announced was a move to restore balance in the valuation.

OverallSep 2009Jun 2009Sep 20085-yr Avg
Score (0 to 100)23295438

The disappointing third quarter has led to further reductions in Nokia's already weak gauge scores.  The four category-specific gauges all have a scores below 10 points (25 is the maximum for these gauges), and Growth has sunk to zero. 

The current Overall gauge score is the lowest it has been for Nokia in more than 10 years.

Full disclosure: Long NOK at time of writing.

No comments:

Post a Comment