This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Analysts gone wild, Part Deux
Yesterday, we talked a little bit about the crazy-optimistic predictions Wall Street analysts have begun making for Research In Motion (NASDAQ: BBRY  )  lately. How the stock's gone from $6 to $18 in virtually a heartbeat. How analysts are promising we'll see 6 million BlackBerry 10 devices sold in 2013. No, wait! 16 million! 29 million! 51 million! ("Sold! To the analyst in the tinfoil hat.")

Today, we should probably talk about the equally crazed negative sentiments now surrounding Apple, in the wake of the company's announcement that it beat earnings last quarter, generated a simply astounding $47.4 billion in positive free cash flow for the year -- but yes, failed to measure up on its prediction about next quarter's sales numbers.

The plain truth of the matter, though, is that everybody else is already talking about Apple today, so... I think I'll just talk about Nokia (NYSE: NOK  ) instead.

Analysts go mild
Shares of the Finnish phone maker got hit by a double whammy yesterday, when StreetInsider.com pointed out that two former fans -- Standpoint Research and Danske Bank -- have cut their ratings on the stock. The shares are taking another 5% hit today, on news that the company is will pay no dividend for 2012, expects to earn negative operating margins on its phones in Q1 2013, and could even (conceivably) lose money at its Nokia Siemens telecom equipment joint venture.

Given the news, both downgrading analysts are looking pretty smart today. But here's the thing: While we don't know precisely what Standpoint is thinking about Nokia right now, StreetInsider did lay out Danske's reasoning for downgrading the stock -- and it had little if anything to do with the earnings Nokia just reported.

Turns out, Copenhagen's Danske Bank is looking farther down the road instead, and reasoning that in 2013, Nokia's efforts to sell more mid-range Lumia smartphones will pressure average selling prices across the company's several product lines. At the same time, Danske worries that "demand for Nokia's feature phone are also likely to stall following the fourth-quarter of 2012," according to StreetInsider.

So on the one hand -- slimmer profit margins from smartphones. On the other hand -- less revenue from feature phones. Sounds like a good reason to worry about Nokia's prospects in 2013, doesn't it?

Nokia can't catch a break
Actually, no. It doesn't. For one thing, remember that Nokia only just started up the Lumia line a few quarters ago, and up until this past quarter, it was a pretty slow start. Considering that the company wasn't selling a lot of high-end smartphones anyway, an increase in the proportion of mid-range phones making up the whole can't really cannibalize high-end profits much (if at all).

Now, let's slide down the scale and consider feature phones. The main reason Nokia's sales of feature phones are likely to "stall" this year is that more and more people are upgrading to smartphones. Specifically, the same mid-range smartphones that Danske is complaining will dampen Nokia's average selling prices. For example, BGR recently reported that Nokia is making a big push with the aggressively priced Lumia 620 in Asia, launching ahead of the new RIM line and underpricing both rival Windows Phone 8 handset makers, as well as RIM itself.

But is this really a bad thing? Getting customers to trade up from cheaper feature phones to mid-range smartphones instead? Seems to me, if anything, this would increase the average selling prices Nokia is getting across its several tiers of phones.

Foolish final thought
Personally, I think Danske's trying too hard to find a bone to pick with Nokia here. But it needn't. If you want a reason to worry about this stock, they're not hard to find. For example, even after this morning's news, Nokia still isn't profitable on a full-year basis. It's still burning cash on a trailing-12-month basis. Its Lumia smartphones still sell only a fraction of units Android and iPhone put up every year. In short -- success is not guaranteed.

Meanwhile, the company's telecom equipment business is earning a nice profit. But it's also competing with Alcatel-Lucent (NYSE: ALU  ) , a formidable force in the industry, and one that's fighting for its financial life. Alcatel secured a $2.1 billion lifeline to keep hanging on, so it's motivated to sell its products cheaply in order to maintain market share (and cash flow). Indeed, while Nokia Siemens is enjoying record profits now, the company warned in today's earnings release that if operating margins will probably be positive next quarter, they could dip as low as negative 1% -- and the company cited "competitive industry dynamics" as being one reason for this.

 All that said, long-term, I'm optimistic about the company's chances. GAAP-profitable once again this quarter, Nokia also reported generating 417 million euros ($557 million) in positive free cash flow (operating cash flow minus capital expenditures) for the fourth quarter. Run-rate that number out to a full year, and the company could theoretically generate $2.2 billion in annual cash profits -- which would make for a 7.5 price-to-free-cash-flow ratio on the stock.

When you get right down to it, therefore, I think there's more reason to be optimistic about Nokia after the downgrades -- and after the details on earnings -- than there was before. Result: I'm actually beginning to regret cashing out early (and at a profit), and considering getting back into Nokia myself.

Nokia's been struggling in a world of Apple and Android smartphone dominance. However, the company has banked its future on its next generation of Windows smartphones. Motley Fool analyst Charly Travers has created a new premium report that digs into both the opportunities and risks facing Nokia to help investors decide if the company is a buy or sell. To get started, simply click here now.


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Comments from our Foolish Readers

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  • Report this Comment On January 24, 2013, at 6:43 PM, TimKnows wrote:

    What's really funny is all of the Fools on this site who think they are analysts without any knowledge of investment principals. How many of these articles would make it past a first year high school business course! LOL

    Really. Telling readers to buy Apple all the way down from $ 700 is a complete laugh! Andrew Tonner has never given good advice in over ayear yet he is allowed to make those hideous videos! Now that's funny!

  • Report this Comment On January 24, 2013, at 10:06 PM, Tjwicker wrote:

    Thanks to the advice of this Foolish site, I invested in Apple, and now I'm SHOCKED at the hit Apple took today...Nah just kidding I went against their advice and invested in RIM, can't say that I'm disappointed.

  • Report this Comment On January 27, 2013, at 12:45 PM, thanhle25 wrote:

    Don't listen to any of Fool's articles. All I've been hearing from them is to buy Apple stock and sell RIMM. I must think all of Fool's analysts own alot of Apple shares or Apple must pay them so much money to write such daily articles. Every single article is about buying Apple and selling RIMM. Guess what! I've been making tons of money from RIMM.

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