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Buy Nokia Ahead of Earnings

Richard Saintvilus

NEW YORK ( TheStreet) -- The stock market has a funny way of making you change your mind about a company you once spent so much time criticizing.

Although I haven't been Nokia's biggest supporter over the past couple of years, I've been nonetheless impressed at the manner that Nokia's management has altered the company's outlook through a series of recent moves.

Companies don't reach the depths Nokia has suffered without having grossly mismanaged their business. By the same token, I'm willing to now give management credit for (at least) improving Nokia's financial position, while at the same time keeping Nokia's head slightly above water within the flood of smartphone competition against the likes of Apple and Google .

I'm not ignoring the reality that this company still has plenty of work to do. Returning value to shareholders is not going to happen overnight. But the company has begun to show some positive signs. And investors are no longer questioning whether Nokia, which was once anointed at the best recovery candidate, can still turn things around. With second-quarter earnings due out Thursday, management must say the right things to ensure investors this former high-flyer is still a good bet.

Without a doubt, profitability will be a heavily discussed topic during the earnings announcement. I'm not going to downplay the importance of the bottom line, but I also understand that Nokia has been working hard over the past couple of quarters looking for ways to reduce expenses. So far this strategy has worked perfectly. This is even though the company received plenty of criticism for cutting costs while the competition spent heavily to grow.

To be completely honest, I was among those who raised eyebrows at this strategy. So now it's only fair to point out that it was management's fiscal awareness (among other things) that allowed Nokia the latitude to buy the remaining 50% stake that it had not already owned in the NSN (Nokia Siemens Network) joint venture with Siemens .

So, with respect to profitability, I don't expect that management will reveal a sudden move in a different direction. As such, I expect the company to meet, if not beat, its earnings targets. I also don't expect that management will have any trouble advancing margins, especially since gross margins improved by almost 4% in the April quarter, which helped Nokia reverse last year's loss into a modest profit.

Revenue, however, will be the biggest question mark during the call. Management has not figured out ways to reverse the trend of declining sales and market share. The 25% year-over-year decline in overall unit sales in the April quarter was the perfect example. Also disappointing was that Nokia's overall revenue declined 20% despite a 30% sequential improvement in Lumia sales - leading to a 32% decline in the devices business.

In the upcoming second-quarter report, the Street will be looking for a loss of 2 cents per share on revenue of $8.62 billion, which would represent declining revenue of 11%. Given how poorly BlackBerry performed in its first-quarter report, along with downbeat results from Samsung, I would be surprised if Nokia was able to meet consensus revenue.

But as I've said above, even if Nokia were to miss on revenue, that still wouldn't mean it was a disappointing quarter -- not if cash flow is improving. Given the deficits this company has had to work with, Nokia's overall revenue performance has to be assessed on a quarter by quarter basis at this point. Let's not also forget that its recent acquisition of NSN, which should produce higher margin returns over the next couple of years will require more time.

It's still too premature to speculate on how much value NSN will bring. But I will be paying attention to any details management will share during the conference call about Nokia's new capabilities and growth prospect.

From an investment perspective, I'm beginning to believe in Nokia's recovery potential. Accordingly, I would be a buyer here ahead of earnings and I expect that Nokia will become the subject of acquisition rumors as profitability continues to improve.

At the time of publication, the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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