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We are upgrading our recommendation on Nokia Corp. (NOK - Analyst Report) to Outperform based on the company’s fourth quarter of 2012 financial results, which significantly outpaced the Zacks Consensus Estimates.

Why the Upgrade

Nokia’s flagship Lumia series of smartphones received reasonable market traction in the lucrative North American region. Further, its mid-range Asha series of full touchscreen phones also performed well in the emerging Asia-Pacific region.

During the quarter, the company also improved its margins and cash position. A strong balance sheet with nearly $6 billion of net cash and a powerful patent portfolio will sustain the company’s long-term R&D activities. Moreover, Nokia Siemens Networks joint venture has shown signs of a turnaround. Nokia currently has a Zacks Rank #2 (Buy).

Other Positives

The Nokia-Microsoft (MSFT - Analyst Report) combination may become a formidable challenger to Apple’s iOS and Google’s Android. Nokia is utilizing its expertise on hardware design and language support to innovate the Windows Phone 7 platform in areas like imaging.

Microsoft will pay $1 billion to Nokia over a period of 5 years for the promotional expenses of Windows-based smartphones. This will not only mitigate the marketing expenses of Nokia but also have a positive impact on the company’s financials in the years to come.

Nokia has decided to lay off nearly 10,000 employees by the end of 2013.The cost-cutting measures will result into $1.26 billion of restructuring charges. However, the company will be able to save approximately $3 billion per annum in its core Devices & Services segment.

In addition, Nokia-Siemens Networks has decided to reduce its headcount by 17,000, which is expected to result in an annual cost reduction of approximately $1.35 billion by 2013. Divestitures of non-lucrative segments, such as microwave transport and fixed-line broadband access businesses helped the company to concentrate on its core business of wireless and fiber-based networks.

Other Stocks to Consider

Other stocks to consider in the mobile handset market are Apple Inc. (AAPL - Analyst Report), Research In Motion Ltd. and Google Inc. . While net earnings of Apple just managed to beat the Zacks Consensus Estimate in the most recent quarter, Research In Motion and Google both handily beat the Zacks Consensus Estimate. All these three stocks currently have a Zacks Rank #3 (Hold).

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