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StockBeat: Opportunity Knocks for Nokia's New CEO

Stock MarketsJul 31, 2020 05:49AM ET
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By Geoffrey Smith -- Nokia (HE:NOKIA)is finally getting some uplift from the the U.S.-led campaign against its biggest rival Huawei.

The Finnish maker of telecoms network equipment said it expects sales to rise and margins to increase in the second half of the year, as network operators who were put off from some big-ticket orders in the first half due to the pandemic get around to signing new contracts for 5G delivery.

As with its Swedish competitor Ericsson (BS:ERICAs), the long-term competitive outlook for Nokia (NYSE:NOK) continues to improve as the U.S.’s determination to squeeze Huawei out of western markets slowly persuades traditional allies to fall in with Washington’s lead.

The company reported adjusted operating profit of 423 million euros for the second quarter, beating consensus forecasts by more than one-third.

Nokia now expects operating margin to improve to 9.5% (albeit still within a wide range of possible outcomes) from a previous target of 9%, and earnings per share of 25 cents, up from a range mid-point of 23c in March. Nokia stock leaped by over 13% to a three-week high and is now tantalizingly close to a big upward gap that was created last October.

While sell-side analysts can expose themselves to accusations of engineering upside ‘surprises’ for the stocks they cover, Nokia’s dismal performance over the last four years has given them ample reason to be pessimistic, so the element of surprise in Friday’s release is more real than for many other stocks. Revenue still came in below forecasts, after all.

Having missed out on much of the boom in orders for 5G equipment due to the difficulties of absorbing Alcatel-Lucent (PA:ALUA), which it bought in 2016, Nokia stock is long overdue some outperformance. It’s still down 26% over the last three years, a period in which Ericsson stock has risen 96%. Its price-earnings ratio, though high at 58x, is distorted by an abnormally low denominator, and is in any case only half of Ericsson’s 121x.

The key variable is, of course, delivery. Nokia appeared to have clinched a transformative deal with Alcatel-Lucent only four years ago, before undoing its good work with a botched integration.

As of next week, there’ll be a new CEO in charge: Pekka Lundmark, a Finn whose experience in the dour world of fossil-fired power stations with Fortum is a stark contrast with Rajeev Suri, who symbolized the embrace of a globalized market.  

Lundmark takes over at a favorable time, when Nokia’s new ReefShark chipset is making it more able to compete even without the help of geopolitical pressure and when – you might think – the worst of its cyclical and internal problems are behind it.

Still, until Lundmark can prove his ability to run a global company, it remains the riskier choice of Europe’s two big 5G suppliers.

StockBeat: Opportunity Knocks for Nokia's New CEO

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