It's time for companies to release any material changes to their forecasts for the current quarter, and telecom giant Nokia
The company said its Q3 EPS would come in at or above its previous estimates of pro forma 0.15 to 0.17 euros and reported 0.14 to 0.16 euros. The bad news is Nokia expects Q3 mobile phone revenues to be flat or slightly off vs. last year's Q3. The good news is the company attributes this to the dollar's large drop this quarter against the euro -- Nokia's reporting currency.
That means mobile phone sales volumes are up. The company forecasts Q3 volumes to grow 10% year over year. Because mobile phones were 77% of the company's revenues last year, this is especially nice.
Given the currency factor for the mobile phones unit, the EPS improvement must come from continued cost cutting at Nokia Networks, which despite a 15% to 20% year-over-year sales drop, expects a breakeven "pro forma operating profit." Nokia Networks brought in 22% of the company's year 2002 revenues and has suffered from the same revenue drops afflicting other telecom network suppliers, such as Lucent
Overall, this would seem to be good news to me, but shares dropped from yesterday's $17.07 as much as 7% in pre-market trading. This brings to mind the stock's 25% plunge on July 17 -- from $17.95 to $14.38 -- when the company warned that Q3 mobile phone sales would be, uh, "flat or slightly down year on year, largely due to a major depreciation of the U.S. dollar, compared to the same period in 2002." Word for word, it's the same language as today's. Is anyone reading with brain in gear? If anything, with the confirmation of increasing volumes, the news today is better than it was then.
For a large well-run company that has responded to a global slowdown with cost-cutting and new exciting products, these short-term market responses are funny peculiar, and maybe even funny ha ha. They do offer potential opportunities. Nokia shares after the drop in July sold for an enterprise-to-free cash flow multiple around 11 and market-cap-to-free cash flow of 14.5, and they aren't much higher than that today.
Take your pick: This is either low for a cash machine relative to respectable future growth fueled by a slew of new phone introductions and a large replacement cycle -- suggested by new Gartner data and forecasts of an end to the two-year handset slump -- or it's a fair price for a maturing company selling increasingly commoditized products.
I chose the former and purchased Nokia shares in July for the sleep-at-night portion of my portfolio. I'll watch -- as should you -- each quarterly report and Nokia's growth. Currency valuations shift from moment to moment, and while they may hurt Nokia today, they have helped in the past and will again. It's a wash. Pay attention to sales volumes and margins. Oh, and the network biz won't be dead forever.
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Senior analyst Tom Jacobs owns shares of Nokia. Read more in his archive. Join Tom as guest analyst in the upcoming issue of Tom Gardner's Hidden Gems.
