Nokia Slides Further to Junk Status

Nokia Corporation’s (NOK - Analyst Report) woes continue to deepen as rating agency Standard and Poor’s has further downgraded it to junk status and has also slapped a negative outlook on the company. According to S&P, deteriorating profit and lowering of future guidance has resulted in the rating cut.

S&P has downgraded both Nokia’s long- and short-term credit rating by two notches to BB- from BB+ and has warned that there are chances of further rating downgrades in future. The recent downgrade of Nokia’s credit rating means that it will be more expensive for the company to raise money from the capital markets.

Nokia has been fighting market share loss from rival Apple Inc’s. (AAPL - Analyst Report) iPhone, and a gamut of other smartphone manufacturers using Google Inc’s. (GOOG - Analyst Report) Android platform. It is expected that the company’s struggle will continue in recent future as it continue its transition from Symbian to Microsoft Corporation’s (MSFT - Analyst Report) Windows based operating system.

Recently, the company has lost its top position to South Korea’s Samsung Electronics and is also facing margin erosion and severe cash losses. In a bid to beat this difficult situation the company is trimming its workforce by 10,000, downsizing its research and development units and selling its luxury phone unit Vertu thereby helping it to reduce $2 billon in cost by the end of 2013.

Currently, Nokia is under the scanner of all the major rating agencies after Moody's and Fitch recently downgraded the Finish phone maker to junk category. The company got a shot in the arm after it declared that the company’s Lumia customers won’t be able to upgrade their phone to Windows 8 software. Grappled with falling sales Nokia also halved the prices of its latest Lumia offerings in North America.

Amidst these negative sentiments we are concerned about the company’s future. We believe that though the company is slated to launch new phones based on the Windows 8 platform it could face further slide in rating if it fails to stabilize its revenue and margins going ahead.

The current Zacks Consensus Estimate for Nokia Corporation is pegged at a loss of 11 cents for the third quarter with a growth rate estimate of (382.35%). For 2012, the Zacks Consensus Estimate stands at a loss of 37 cents with a growth rate of (197.97%) but for 2013 the Zacks Consensus Estimate stands at breakeven with a growth rate of 100.00%.

Recommendation:

We retain our long-term Neutral recommendation on Nokia. Currently, it has a Zacks #3 Rank, implying a short-term hold rating.