Nokia: Bernstein Cuts Rating To Underperform; Target $6.67

Bernstein Research analyst Pierre Ferragu this morning cut his rating on Nokia (NOK) to Underperform from Market Perform, with a new target price of $6.67, down from $10.67.

“Over the summer, we have seen an acceleration of the structural headwinds Nokia will suffer in the medium term, and the timing of the recent changes in the management team indicates a likely difficult internal situation as well,” he writes in a research note. “Nokia therefore starts the Christmas season and 2011 on the wrong foot; and most worryingly, we see growth expectations for next year as unreasonable. We believe the handset market as a whole will barely grow in value, leaving Nokia with a decline in top-line.”

For 2010, he cuts his EPS forecast to 68 cents, from 72 cents; more alarmingly, for 2011, he goes to 63 cents, from $1.04.

He offers three reasons why Nokia is likely to see “steep deterioration” in performance over the next 18 months:

• Market traction for Android is accelerating, putting the Google-based phones at a run-rate close to that of Nokia phones, which he contends will “translate into an immediate increase in the competitive pressure that Nokia has to deal with.”
• The handset market overall “will be more challenging” in 2011, after a strong 2010. “This 2010 rebound is driven partly by a normalization of channel inventories, and partly by an uptick in the replacement market,” he writes. “These two drivers should tail off next year, leaving the market with about 5% volume growth and virtually no value growth � or if any all captured by premium brand players. In 2010, Nokia is posting only stable devices sales, despite a positive currency context. In a sluggish market, we would expect Nokia to post flattish shipments and negative sales growth in 2011, driving a much lower earnings power than what the recent stock price implies and than what consensus expects today.”
• Management changes at Nokia “are a sign of a crisis situation today and an early indicator of more hurdles to come in the near term.” And he adds that the CEO change, coming just ahead of a major product refresh, and a week before the company’s recent Nokia World summit, had “the worst” possible timing.

Concludes Ferragu: “As a consequence, we believe Nokia cannot deliver consensus expectations for next year. Uncertainty remains for the second half of 2010 which could see a mechanical boost from new product launches, but even on that front we remain very cautious.”

NOK this morning is down 16 cents, or 1.6%, to $9.90.