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Rating agency Standard and Poor's (S&P) recently downgraded the credit rating of Nokia Corp. (NOK - Analyst Report) to BB+ from BBB-. The rating agency has also downgraded the company’s short-term credit rating to B from A-3. With this downgrade, Nokia’s debt now falls under the junk category, which is a notch lower than its previous investment grade rating of BBB-.
The company’s poor first quarter results coupled with the news that Samsung Electronics has surpassed Nokia as world’s largest mobile phone maker was mainly responsible for the rating downgrades.
Recently, Nokia announced disappointing financial results for first quarter 2012 based on increased competition from Apple Inc.’s (AAPL - Analyst Report) iPhone and a gamut of smartphones that runs on Google Inc.’s (GOOG - Analyst Report) Android operating system. Nokia also faces stiff competition in the low-end segment from Chinese manufacturer ZTE.
S&P also held Nokia’s disappointing outlook for the second quarter of fiscal 2012 responsible for the downgrade. Recently, Fitch also downgraded Nokia’s credit rating to junk category while Moody’s slashed it to near junk status. S&P has warned that it could further slash the telecom giant’s ratings if it fails to improve its financial performance.
Currently, Nokia is in a transition phase, shifting from its own Symbian-based feature phone to Microsoft Corp. (MSFT - Analyst Report) developed windows-based smartphones. Sales has been slowing and as per data published by research firm Strategy Analytics, Nokia has been overtaken by Samsung as the world’s largest mobile phone manufacturer, with 44.5 million smartphones sold in the first quarter compared to Nokia’s 12 million.
Moreover, Nokia’s latest LTE-based Lumia 900 smartphone is facing some data connection problems, which could hamper Lumia’s success. To reduce its loss, the company plans to trim down its costs, improve its cash flow and introduce innovative new products.
Based on these measures, we believe Nokia plans to turnaround its fortunes and avoid any further downgrades. However, we remain very much skeptical regarding the company’s turnaround any time soon.
We, therefore, retain our long-term Underperform recommendation on Nokia. Currently, Nokia has a Zacks #5 Rank, implying a short-term Strong Sell rating.
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