Filed Under: ,
Tickers in this Article: NOK, AAPL, RIMM, ERIC, SNE
Investors take note: A company that reports better-than-expected results does not always translate into a great buying opportunity. While quarterly numbers tell you a lot about the company's past performance, it says nothing about its future. Even the smallest sign of poor growth ahead can quickly send the company's stock south. IN PICTURES: 7 Tools Of The Trade

Heading for the Exits
That's what happened to cell phone giant Nokia (NYSE:NOK). The Finnish group's second quarter topped Wall Street analyst estimates, and Nokia CEO Olli-Pekka Kallasvuo reckons the tumbling cell phone market may well be bottoming out.

But who can blame investors for heading for the exits. Besides the fact that Nokia posted a 66% drop in Q2 earnings and a 25% drop in sales, the company forecasts that flat to slightly higher sales next quarter won't be matched by gains in market share or profit margins. Nokia's stock tumbled more than 14% on the news. (For more, see Core Earnings Measure Up.)

Tough Times Ahead
Indeed, the worst may be over for Nokia. SonyEricsson, the mobile phone joint venture of Sony (NYSE:SNE) and Ericsson (NYSE:ERIC), also sees signs of an easing in the sales slump. But by the looks of things, Nokia still has tough times ahead. The price of an average Nokia handset dropped a staggering 16% from last year, a strong reminder that, by and large, customers are still switching over to cheaper phones these days.

The economic downturn, of course, is to blame for much of Nokia's troubles. All the same, Nokia is is hardly doing a great job of keeping up in smartphones, the only gadgets in the industry enjoying solid sales growth. Its touch screen N97 - Nokia's answer to Apple's (Nasdaq:AAPL) iPhone and Research in Motion's (Nasdaq:RIMM) Blackberry devices - only went on sale in June.

Accounts Receivable Issues
What spooks me is the rising level of days of sales outstanding, a signal that Nokia's accounts receivable have jumped from from 66 to 82 day of revenue. Accounts receivable are down, no doubt due to the economic slump, but revenues have fallen disproportionally, suggesting that Nokia, to convince retailers to take its gadgets, is not only lowering prices but also sweetening payment terms.

Bottom Line
When things turn around and customers do start looking at paying-up for fancier phones, Nokia will also have to regain its innovative edge in market segments that count. That won't be easy, and judging by its share price performance, investors know it. (For further reading, see Dial Up Choice Telecom Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center