Nokia Gets Moody's Credit Warning

Zacks

Nokia Corporation’s (NOK) struggle continues as Moody’s Rating Agency has issued a credit warning to the company after it reported weak financial results for the second quarter of 2013. Drop in sales and continuous cash drainage has also been cited as a reason.

Nokia already holds a Ba3 rating from Moody’s, which implies a junk status for the Finnish handset manufacturer. The status signifies Nokia’s uncertain creditability and the loss of financial institutions’ trust in the company. According to the rating firm, continuous drop in the top line could further deteriorate Nokia’s rating by one notch as the company battles to maintain its smartphone market share.

Recently, Nokia agreed to acquire Siemens AG’s (SI) 50% stake in its equipment joint venture, Nokia Siemens Networks (:NSN), for nearly $2.15 billion. At the end of second-quarter 2013, Nokia had approximately $11.9 billion of cash and marketable securities on its balance sheet. The rating firm believes that acquiring Siemen’s stake will bring the company’s cash position below the minimum amount required to maintain the Ba3 rating. 

This is the second rate cut for Nokia as Standard & Poor recently downgraded the handset manufacturer’s long-term credit rating to B+ from BB-. According to the rating agency, Nokia’s full control over NSN might weaken the company’s balance sheet.

In the recently reported second quarter of 2013, Nokia’s quarterly adjusted (excluding special items) earnings per share of a break-even were better than the Zacks Consensus Estimate. However, the company’s quarterly revenues registered an annualised fall of 24.5% and were also below the Zacks Consensus Estimate.

Nokia’s flagship Lumia smartphone had an unfavourable quarter as the company continues to lose market to Apple Inc.’s (AAPL) iPhone and smartphones running on Google Inc.’s (GOOG) Android platform. Nokia shipped only 7.4 million units reporting a 27% annualized decline. Nokia’s feature phone segment also performed poorly and shipped only 53.7 million handsets.

At the end of the first half of 2013, Nokia’s total debt improved to $4,645 million as compared to $7,003 million at the end of 2012. Although Nokia’s debt position has improved, we believe that declining market share along with continuous cash loss could impact the handset manufacturer’s rating further.  

Nokia currently carries a Zacks Rank #3 (Hold).

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