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:
- Cash Management: 7 of 25 (up from 4 in June)
- Growth: 0 of 25 (down from 1)
- Profitability: 4 of 25 (down from 10)
- Value: 7 of 25 (down from 9)
- Overall: 23 of 100 (down from 29)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.
|Cash Management||Sep 2009||Jun 2009||Sep 2008||5-yr Avg|
|Days of Sales Outstanding (days)||83.4||82.0||69.7||58.8|
|Working Capital/Invested Capital||71.7%||51.6%||30.2%||234.7%|
|Cash Conversion Cycle Time (days)||40.6||40.2||34.8||28.9|
|Gauge Score (0 to 25)||7||4||3||10|
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.
|Growth||Sep 2009||Jun 2009||Sep 2008||5-yr Avg|
|Operating Profit growth||-2.4%||5.4%||31.0%||4.1%|
|Net Income growth||N/A||-66.4%||-17.6%||-2.7%|
|Gauge Score (0 to 25)||0||1||3||11|
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.
|Profitability||Sep 2009||Jun 2009||Sep 2008||5-yr Avg|
|Free Cash Flow/Invested Capital||7.8%||14.4%||69.7%||98.9%|
|Score (0 to 25)||4||10||14||14|
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.
|Value||Sep 2009||Jun 2009||Sep 2008||5-yr Avg|
|P/E vs. S&P 500 P/E||3.8||1.1||0.7||1.2|
|Enterprise Value/Cash Flow (EV/CFO)||37.0||26.7||10.7||20.7|
|Score (0 to 25)||7||9||21||6|
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.
|Overall||Sep 2009||Jun 2009||Sep 2008||5-yr Avg|
|Score (0 to 100)||23||29||54||38|
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.