14 February 2010

NOK: Financial Gauge Analysis for the December 2009 Quarter

This post provides updated Cash Management, Growth, Profitability and Value metrics and our Financial Gauge scores for Nokia (NYSE: NOK).  The metrics were calculated using data in Nokia's financial reports, including the earnings announcement [pdf] for the quarter that ended 31 December 2009.

We have already examined the Income Statement for the December quarter.  Nokia earned €0.26 per diluted share, up from €0.15 in the fourth quarter of 2008.

Nokia has been a leading global producer of mobile phones since 1998, but it is facing increasing competition from companies such as Apple (NASDAQ: AAPL) in the marketplace (and courtroom) for smartphones.  Some background information about Nokia and the business environment in which it is currently operating can be found in the beginning of the look-ahead.

The latest quarterly results produced the following changes to the gauge scores:

The Euro (€) is the currency used in Nokia's financial statements, which are prepared in accordance with International Financial Reporting Standards (IFRS)

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

Cash Management31 Dec 200930 Sep 200931 Dec 20085-yr Avg
Current Ratio1.
Debt/CFO (years)
Inventory/CGS (days)
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)77.280.876.259.7
Working Capital/Revenue15.4%12.7%13.8%20.1%
Cash Conversion Cycle Time (days)35.939.040.629.1
Gauge Score (0 to 25)155510

In 2009, Nokia altered its capital structure to include much more Debt.  Long-term debt increased from €861 million in December 2008 (6.1 percent of Shareholders' Equity at the time) to €4.43 billion now (33.9 percent of Equity). 

At the end of September quarter, we calculated the Debt load (short- and long-term) as equivalent to 3.8 years of Cash Flow from Operations.  However, much stronger Cash Flow in the December quarter brought the debt equivalence to a much less burdensome 1.6 years.  This was one contributor to the big improvement in the Cash Management gauge score.

Another positive change was the reduction in the company's Inventory level from 31 days at the end of 2008 to 28 days when last year ended.

Although the Days of Sales Outstanding remains higher than it was a year ago, it is lower than it was at the end of the September quarter.  Coupled with the aforementioned Inventory reduction, these efficiency improvements drove down the Cash Conversion Cycle Time rather significantly and to the benefit of the gauge score.

Growth31 Dec 200930 Sep 200931 Dec 20085-yr Avg
Revenue growth-19.2%-22.5%-0.7%6.8%
Operating Profit growth-6.9%-2.4%24.7%1.2%
CFO growth1.6%-77.3%-59.4%8.9%
Net Income growth-93.3%#N/A-42.4%1.4%
Gauge Score (0 to 25)10311
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 in the whole of 2009 was 19 percent less than in 2008.  However, the decline moderated by the end of year because the fourth quarter Revenue was down only about 5 percent.

Revenue was also substantially lower as a percentage of the company's total Assets.

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 recent decline.

The decline in Net Income was exacerbated the staggering third-quarter €908 million intangible-asset impairment charge related to Nokia Siemens Networks. 

A bright spot is that a better fourth quarter pushed Cash Flow from Operations for the year above that of the year earlier.

Profitability31 Dec 200930 Sep 200931 Dec 20085-yr Avg
Operating Expenses/Revenue94.4%95.7%88.7%88.9%
Free Cash Flow/Invested Capital25.6%7.8%28.6%100.4%
Accrual Ratio-0.6%3.1%9.3%-1.4%
Gauge Score (0 to 25)941213

Nokia's Operating Expenses, which had been increasing as a percentage of Revenue, came down a notch in the fourth quarter.

The recovery in the Free Cash Flow ratio had an even greater effect on the Profitability gauge score.  Rising Cash Flow also helped with the Accrual Ratio's indication of Earnings Quality.

The ROIC is still suffering from weaker performance and special charges earlier in 2009.

Value31 Dec 200930 Sep 200931 Dec 20085-yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)13.636.917.416.3
Gauge Score (0 to 25)117176
Share Price ($)$12.85$14.62$15.60-

The 12 percent decline in the price of Nokia ADRs during the fourth quarter, coupled with a strong fourth quarter, was welcomed by the Value gauge.

The earnings-related multiples remain unattractive, but the Revenue and (especially) Cash Flow figures should be more appealing.

Overall31 Dec 200930 Sep 200931 Dec 20085-yr Avg
Gauge Score (0 to 100)41214739

The Overall gauge score for Nokia bottomed out in the third quarter with its lowest reading in a decade.  Our expectations for the fourth quarter were modest, at best.  However, Nokia ended the year with better numbers than seemed likely a few months earlier.  Margins improved and Cash Flow was surprisingly strong.  These results lifted each of the category gauges, although a 1-point Growth gauge is no cause for celebration.  The Cash Management gauge performed the best, and the Value gauge got an added boost from a dip in the ADR price. 

Full disclosure: Long NOK at time of writing.

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