EUR 850.00 For Business Accounts Only

Morningstar | Nokia Closes 2018 With Strong 4Q; Raising FVE to $8

No-moat Nokia's fourth quarter showcased year-over-year growth of over 3% as all its divisions within the Networks business grew. IFRS operating margin of 8% was in line with our projections as Nokia improved gross margins while curtailing expenditures. On the year, Nokia's sales declined by 2.5%, which was slightly better than our expected 3.1% annual decline. We believe 5G networks will be the main growth catalyst while Nokia shifts toward more profitable products alongside cost savings efforts. After rolling our model and reaffirming our thesis that Nokia will execute on expanding operating margin, we are increasing our fair value estimate to $8.00 from $7.60 (EUR 7.00 from EUR 6.70). With shares trading around $6.30, we believe Nokia is an attractive investment in the telecommunication equipment space.

Nokia management warned that 2019 sales should be flattish due to a soft first half, particularly a weak first quarter, followed by a healthy second half of the year. The main guidance drivers are due to 5G rollout schedules, 5G ecosystem and standards development, and hardware deployments remaining on Nokia's backlog until 5G software availability and acceptance is completed. In our view, these near-term speedbumps will be offset by strong tailwinds created by 5G demand as carriers start offering 5G networks in the latter half of 2019 and onward. We expect modest revenue growth due to Nokia's wide product and software portfolio driving cross-sells across business divisions and for the company to benefit due to sanctions on its Chinese competitors.

In our view, the firm's cost savings efforts and mix-shift toward higher profitable product sales will drive operating margin toward 3% in 2019 versus negative 0.3% in 2018. Alongside increased high-margin technology license generation, we like that Nokia is focusing on software and enterprise customers as we posit this will diversify the company away from teclo reliance and yield sustainable operating income.

Nokia announced its intention to propose a EUR 0.20 dividend per share at its 2019 annual general meeting, and dividends will move to being paid quarterly. Management reiterated its longer-term intention of returning dividends equal to 40%-70% of non-IFRS EPS results. The company announced that it would restructure its reporting buckets into Networks, Nokia Software, and Nokia Technologies. In our view, this provide more granularity into the higher margin buckets of software and technology licenses. Additionally, Nokia will provide sales information between communication service providers, enterprises, and licensee customer types.