03 May 2010

NOK: Financial Gauge Analysis for the March 2010 Quarter

Nokia Corp. (NYSE: NOK) earned 0.09 per diluted share, in accordance with IFRS, in the first quarter of 2010.  IFRS earnings tripled the €0.03 made in 2009's first quarter.  On an non-IFRS basis, Nokia's earnings per share increased from €0.10 to €0.14.

In our earlier review of Nokia's Income Statement, we compared the actual results to our "look-ahead" estimates

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.  This post reports on the metrics for Nokia and the associated financial gauge scores.  The metrics were calculated using data from Nokia's current and historical financial statements.

Headquartered in Espoo, Finland, Nokia shipped 432 million mobile phones in 2009.  The company's hand-held product line runs the gamut from modest entry-level devices to high-end smartphones.   Nokia also sells network infrastructure.  Additional background information about Nokia and the business environment in which it is currently operating can be found in the beginning of the look-ahead.

In summary, Nokia's latest quarterly results produced the following changes to the gauge scores:

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

Cash Management31 Mar 201031 Dec 200931 Mar 20095-yr Avg
Current Ratio1.
Debt/CFO (years)
Inventory/CGS (days)26.728.231.526.6
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)73.477.278.260.9
Working Capital/Revenue17.6%15.4%12.9%19.2%
Cash Conversion Cycle Time (days)33.035.943.129.7
Gauge Score (0 to 25)1815510

Nokia's long-term debt increased more than 400 percent in 2009, from €860 million (a mere 5 percent of Shareholders' Equity at the time) to €4.4 billion (30 percent of Equity). 

Because Nokia had substantial amounts of Cash and Short-term Investments (€6.8 billion on 31 December 2008), the debt increase was never particularly worrisome.  Nokia evidently decided that the debt market was the best source of funds to pay for the development and marketing of the new products.  With company's formerly high-flying shares a fraction of their former level, the decision was understandable.

Given the state of the credit markets in early 2009, Nokia might have wanted to raise funds before matters got any worse.

The amount of debt has now been reduced to €4.1 billion (26 percent of Equity).  In addition, a recovery in Cash Flow from Operations (+45 percent trailing four quarters), which is source of funds required to pay off the debt, makes the current debt level seem quite modest.

Another positive change was the reduction in the company's Inventory level from 31.5 days in the first quarter of 2009 to 26.7 days in the latest quarter.

The number of Days of Sales Outstanding is also down nicely. 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 Mar 201031 Dec 200931 Mar 20095-yr Avg
Revenue growth-12.9%-19.2%-12.1%5.2%
Operating Profit growth-6.2%-6.9%14.0%-0.5%
CFO growth44.6%1.6%-61.2%26.0%
Net Income growth-84.0%-93.3%-61.3%11.7%
Gauge Score (0 to 25)51111
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 first quarter of 2010 was 3 percent more than in the same period of 2009.  This enable the trailing-year growth measure to stem its decline.

The Revenue/Assets and Operating Profit growth metrics also showed signs of stabilization after steep falls.

Cash Flow from Operations is the bright spot in the Growth table.  The last two quarters turned this important measure upward.

The decline in IFRS Net Income was steepened by a staggering €908 million intangible-asset impairment charge in the third quarter of 2009 (related to Nokia Siemens Networks).  Unusual tax matters in the latest quarter also negatively affected Net Income.

Profitability31 Mar 201031 Dec 200931 Mar 20095-yr Avg
Operating Expenses/Revenue93.8%94.4%91.4%89.3%
Free Cash Flow/Invested Capital26.8%21.5%16.5%116.2%
Accrual Ratio0.0%-0.6%10.2%-0.5%
Gauge Score (0 to 25)1081013

Nokia's Operating Expenses as a percentage of Revenue, which had been increasing, have recently ebbed.  However, the ratio is still high when judged against the company's historic results.

The ROIC bounced up a small amount in the latest quarter.  Special charges in 2009 didn't help it.

As was the case with the Growth metrics, Cash Flow is also the star of the Profitability category.   Free Cash Flow as a percentage of Invested Capital moved up smartly.

Value31 Mar 201031 Dec 200931 Mar 20095-yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)13.413.615.216.7
Gauge Score (0 to 25)911177
Share Price ($)$15.54$12.85$11.67-

The 20 percent rise in the price of Nokia ADRs during the first quarter put some downward pressure on the Value gauge.

The earnings-related multiples remain inflated because of both weak operating performance and special charges. 

The Price/Sales and EV/CFO ratios are lower than their historical averages.

Overall31 Mar 201031 Dec 200931 Mar 20095-yr Avg
Gauge Score (0 to 100)43404538

Nokia's first quarter of 2010 was certainly better than the same quarter of 2009, and the small improvement in the overall gauge score reflects the improvement.  The score, which got down to 20 last fall, would have improved a couple more points if the ADR share price had not rebounded from last year's lows.

The Cash Management gauge score is quite good, and trailing year Cash Flow and Free Cash Flow results led to modest gains in Growth and Profitability.  The latter two scores still clearly on the  weak side.  The Cash Management gauge score benefited from improvements in the debt levels, inventory, and receivables.

The world is watching to see if Nokia can boost earnings by competing more effectively in the profitable smartphone market segment. 

Full disclosure: Long NOK at time of writing.

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