Nokia's Future is Revealed by its Bonds, not its Earnings
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While the shareholders of Nokia Corporation (NYSE: NOK) enjoyed a short-lived jump in the stock price recently due to the second quarter earnings report, far more insight into the future of the company was provided by the downgrading of its bonds by Fitch Ratings Inc.
That is a major reason why Nokia Corporation is down more than 7% for the last week of market action. Last week, Fitch Ratings Inc. took the credit rating of Nokia Corporation down even more into junk territory by lowering the bond ratings two notches lower from BB+ to BB-. Fitch Ratings Inc. also stated that the credit outlook for Nokia Corporation remains negative.
At this price point for Nokia Corporation, the bond actions yield a great deal of market intelligence. When stocks are trading where Nokia is at present, around $1.75 a share, and for Research-in-Motion (NASDAQ: BBRY) at about $6.80, the market action is very sloppy and unclear for a variety of factors. Shorts closing positions can cause distortions in the share price. Much of the buying and selling is done by day traders and other speculators, reacting to the current conditions of the market rather than the future outlook for the company. As legendary financier George Soros once observed, in the short term, financial markets are "chaotic."
Comparing the debt positions with its competitors is also useful for gauging the long term value of Nokia Corporation. When Samsung issued bonds earlier this year, the interest rate paid was lower than that for the Government of South Korea. Headquartered in South Korea, Samsung also supplanted Nokia Corporation earlier in 2012 as the company that sells the most mobile phones in the world.
Other mobile phone competitors such as Apple (NASDAQ: AAPL) are debt-free. Google (NASDAQ: GOOG) has no long term debt and only a tiny amount of overall debt. Even Research-in-Motion does not have any debt. In addition to its share price plunging, the debt-to-equity ratio for Nokia Corporation has risen to a dangerously high level of 0.58. That is debt that now must pay an interest rate in or near the double digits, depending on the terms of the bonds, as a result of the downgrades to junk status for Nokia Corporation.
While Nokia's debt is higher, its level of institutional ownership is much lower than that of others in its sector. It is very positive to have institutional investors such as mutual funds and pension groups as shareholders. Just the act of buying by an institutional investor is a bullish development as it is imprimatur that the company is worthy of ownership by sophisticated buyers with deep research resources.
In addition, this ownership lends stability to a stock as institutional investors buy shares for the long term. Google has institutional owners for 83.55% of its shares. For Apple, the level of institutional ownership is 68.48%. Institutional ownership is over 60% for Research-in-Motion. Nokia Corporation has a level of institutional ownership at just 12.02%.
The recent bond downgrade by Fitch Rating Inc. combined with the "chaotic" nature of short term conditions in the financial markets, the low level of institutional ownership and the deteriorating financial position of Nokia Corporation is why the stock has a beta of 1.56. The beta for the stock market as a whole is 1. That means Nokia Corporation is 1.56 times more volatile than the overall market. The beta for Nokia is much higher than that for Samsung, Google or Apple.
The Q2 2012 earnings of Nokia Corporation were not that positive, overall. In addition, earnings can be made to look better by cuts in employees and research & development that are counterproductive over the long term. For Nokia, Q2 revenue growth was down 19% with gross margins falling about 7%. Phone shipments to the United States are lower by 60% as an obvious result of lower sales, accounting for the recent 50% reduction in the price of the Lumia smart phone. While the sequential revenue growth of 3% could be considered a bullish indicator for the second quarter, the downgrade of the bonds of Nokia Corporation by Fitch Ratings Inc. was a far more bearish development that is very telling for the future of the company.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple, Google, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.