CIEN - Buy Hold Or Sell Nokia Ahead Of Q2 Earnings?

2023-07-17 18:28:13 ET

Summary

• Nokia pre-announced a disappointing outlook ahead of its quarterly report set for this Thursday.
• Cost cut efforts are underway as the firm preserves margins.
• Look out for the company re-affirming a recovery in demand later this year.

Ahead of posting its second quarter earnings report set for Thursday, July 20, Nokia ( NOK ) lowered its full-year guidance. The telecommunications firm blamed weaker demand for the lowered sales and comparable operating margin guidance.

How should investors expect NOK stock to react now after the firm guided net sales unchanged from last year?

Q2/2023 and Full Year Guidance

Nokia expects net sales of around EUR 5.7 billion , flat from last year. The comparable operating margin is around 11%. The operating profit for the quarter will include approximately EUR 80 million related to catch-up net sales from the Nokia Technologies unit. Despite proactively managing costs to protect its profitability, shares sold off on the pre-announcement. Shareholders grew increasingly nervous about the upcoming period of uncertainty.

Management is taking measures to achieve its long-term targets. This includes growing faster than the market. In addition, its long-term comparable operating margin is at least 14%.

In the full-year outlook, Nokia guided a comparable operating margin of up to 13%. This is only 100 basis points shy of the long-term target.

Markets are worried that Nokia already cut all the costs possible. Unfortunately, the firm needs to align costs to changing demand conditions. As demand weakens, Nokia needs to accelerate cost cuts. In 2021, it expected to cut 5,000 to 10,000 jobs . In 2022, it targeted an annual cost cut of around EUR 600 million partly through up to 8,000 job cuts. More recently, it negotiated up to 208 job cuts in Finland . This was part of its 2021 cost restructuring plan.

In the upcoming Q2 report, investors should analyze the company's demand outlook for the rest of the year and beyond. Expect demand momentum from Q1 to continue into Q2.

In Q1, CEO Pekka Lundmark said that Nokia offset weak demand for fixed wireless access from robust demand for fiber. Expect compounded annual growth rate in the low single-digit percentage for Fixed Networks, IP Networks, and Optical Networks. Lundmark did not specify CAGR growth of 2%-4% specifically for 2024. Instead, the CEO expected Nokia would meet that longer-term growth rate range.

The lower full-year guidance jeopardizes Nokia's chances of meeting its CAGR targets. In Q1, the unfavorable software and hardware mix hurt margins. For example, customers ordered more hardware and less software.

The seasonal strength does not come until close to the end of the year. This sets up a weak Q2 and Q3 report. Nokia would need customer demand bouncing back by Q4 to support raising its guidance for 2024.

EPS Estimates

Based on data compiled from Seeking Alpha Premium , analysts expect FQ2 2023 of 9 cents a share. Historically, Nokia beat expectations twice. It also missed consensus targets two times.

Since all seven analysts revised Nokia's fiscal year lower in the last 90 days, it scores a D on the revisions grade:

Stock Grades

Nokia has strong valuation, growth, and profitability grades. It's better than its other two peers, Ericsson ( ERIC ) and Ciena ( CIEN ).

Ericsson posted a SEK0.21 loss in the second quarter. Organic sales fell by 9% Y/Y. In addition, it issued a Q3 outlook that is similar to that of Q2. It expects a recovery in the mobile network markets toward the end of the year. As a result, it expects to meet the lower end of the 15% to 18% EBITA margin target.

Ciena triggered an 11% sell-off after it posted its FQ3 revenue outlook. It guided revenue in the range of $1.0 billion and $1.08 billion . For the fiscal year, its revenue growth of 18% to 22% is within the 19.62% consensus estimate.

Your Takeaway

I rate Nokia stock a "hold" ahead of the earnings report. It does not have a "buy" rating due to the new uncertainties. Management already warned Nokia shareholders ahead of the earnings report. This disappointment sent NOK below the $4.00 support line that began in May. Unless the stock market weakens, the stock should trade in a narrow range after the company posts results.

Seeking Alpha Premium issued a dividend cut warning . However, the yield already is very low at 2.37%. Investors hold the stock for its turnaround potential, not for its income.

Look out for Nokia giving more details on the lowered expectations. Its forecast of a demand recovery by later this year would position it for a rebound by 2024.

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