Wednesday, November 22, 2006

Calls of Note Part 2

- Cowen notes that with expectations low entering next week's Capital Markets Daythey would be surprised if Nokia (NYSE:NOK) failed to produce more than anticipated at the event and see the shares reacting well near term to any positive. Firm's long-term caution remains unchanged, however, and they still expect lower ASPs,NSN costs and QCOM-related expenses to weigh moving forward.

Expecting No Major Surprises At CMD - But Few Are. Nokia will be hosting its annual Capital Markets Days on Nov 28-29 in Amsterdam. Cowen expects little change in tone from senior management at the event, perhaps beating expectations fearing worse. They expect NSN integration costs to be the most likely fade to guidance, but note that many now expect that.

Firm sees Nokia issuing a generally constructive outlook for the mobile phone industry (~8-10% y/y) and reiterating 15% q/q unit growth for 4Q06. The ongoing dynamic maximizing revenue/share at the expense of ASP/margins is likely to continue until new phone products arrive and 3G reaches critical mass.

They believe three items loom as potential issues for the stock over next 6-12 months. 1.) "thin" designs are several quarters away 2.) High Nokia-Siemens Networks integration costs might prove EPS dilutive in 1H07, FY07 3.) High expenses related to QCOM.

Firm's new FY08 EUR 1.18 EPS estimate represents a modest 7% increase from their FY07 estimate and is a penny under consensus. Nokia is having a difficult time attracting a higher multiple because of its modest organic growth and margin contraction.

Trading at 14x their new F08 estimate, Nokia still looks attractively valued but without an
obvious catalyst. Remains at Neutral.

Notablecalls: Nokia has been hibernating and needs to come up with some fascinating products to spark investor interest. The problem is that it's still struggling with the thin designs that will be ancient by the time they reach the mkt. It also looks like they are at the wrong end of the Telco capex. But I guess that leaves ample room for surprise.

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