Bernstein Is Upgrading Nokia & Alcatel; Here's Why

In a report published Wednesday, analysts at Bernstein upgraded Nokia Corporation NOK and Alcatel Lucent SA ALU to Outperform. The price target is set to €9 and €5.40 for Nokia and Alcatel-Lucent, respectively. The upgrade is based on the analysts' analysis of the expected outcome of the merger of the two companies. "We split our time modelling carefully how the new company could evolve in the next 3 years, reviewing potential risks associated with the merger and the integration, and testing sentiment and expectations in the industry, on both sides of the deal and beyond. We conclude with an optimistic perspective," the analysts said. Based on the cost synergies detailed by the management, the analysts expect Nokia to witness a theoretical EPS of more than $0.50 in 2015. There is also likely to be several other areas of upside, according to Bernstein. Revenue might grow in the range of 4-5 percent, while further consolidation might lead to structural margin expansion. Further upside could be driven by IP licensing. "We see no reason for the deal not to go through despite some shareholder grumbling at Alcatel-Lucent, and see, against conventional wisdom, no material execution risk in the integration, given the track record of those on the helm, the right governance starting point and the very clement industry context," the analysts added. Bernstein expects both Nokia and Alcatel-Lucent to significantly outperform over the next 9-12 months, "before consolidating again ahead of the actual integration and rallying again as the latter delivers actual results."