Thursday, February 17, 2011

Nokia: MKM Says Sell; Revenue To Plunge, Brains To Drain

MKM Partners analyst Tero Kuittinen today cut his rating on shares of Nokia (NOK) from Neutral to Sell on “increasingly sharp competition” and a massive brain drain that he expects to result from deep employee dissatisfaction at the company’s casting its lot with Microsoft (MSFT).

Kuittinen describes the avalanche of devices based on Google’s (GOOG) “Android” operating system: “A wide range of impressive new Android dual-core phones are arriving to market in the first half of this year, and Motorola [Mobility (MMI)] is rushing to launch quad-core tablets and handsets in the second half.”

All this, while Nokia has tossed aside its own Symbian platform, making devices based on that software lame ducks.

We think the new Nokia management is unwisely focused on smartphone development at the expense of a much-needed strong revamp of the feature phone platforms. The Windows crash development project has the risk of consuming the vast majority of management’s time and attention just when Nokia badly needs a new direction in the budget phone market, where its share was already sliding dangerously in Asia during 4Q10.

The result is that Kuittinen cut his 2011 EPS estimate to €0.49 from €0.55, as he expects sales to plunge to €40.3 billion this year from €42.45 billion last year, and €2.6 billion less than he had ben estimating.

More important, perhaps, Kuittinen predicts a gutting of the engineering base, as operations may move to North America:

We expect mass defections from Nokia’s key hardware and software employees, as many are deeply disappointed about the company’s new direction. We also believe there are already concrete plans to move Nokia’s smartphone development to North America, and this project, if realized in 2012, further risks demoralizing the work force and creating disruptions in product development.

Nokia’s R&D, furthermore, pressured by the drop in revenue, could be cut by the company to just 8% of revenue from the 12% level it’s expected to be at in the current quarter.

Kuittinen sets a €5.50 price target on Nokia shares, down from €8 previously, and a $7.43 target for the American Depository Receipts (ADRs).

Nokia ADRs today are down 4 cents at $9.06. The ordinary shares traded down 1.3% today to €6.68.

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