Why BMO Is Upgrading Nokia

• Nokia Corporation (ADR) NOK shares are down 3 percent year-to-date, even after hitting a peak of $8.30 on April 13.
• BMO Capital Markets’ Tim Long upgraded the rating on the company from Market Perform to Outperform, while raising the price target from $8 to $10.
• Synergies from the merger of Alcatel Lucent SA (ADR) ALU could be higher than was previously estimated and Nokia’s margin upside is likely to continue, Long commented.

As the acquisition of Alcatel Lucent is nearing completion, Nokia’s shares appear “poised for another run,” with margin being the main driver, as it has been in the past, analyst Tim Long said. He expects Nokia to achieve gross margin upside for the next few years, “which should be positive even if it means NOK being more selective on revenues.”

Long expects Nokia’s cash flow generation to also improve, and its recently announced capital return program to be sustainable. “Last, we believe adding the breadth of products offered by ALU will provide additional revenue opportunities,” he added.

While there was always optimism regarding merger synergies a year ahead, now it seems like there will be upside to the €900 million target, Long mentioned, explaining that Nokia would be able to achieve significantly gross margin expansion at Alcatel Lucent.

Nokia’s management team was able to boost Networks gross margins by more than 1,000 bps over three years. Long believes there is “ample opportunity” to replicate this at Alcatel Lucent.

“Also on IPR, while we remain cautious on hockey stick growth, we are going to add in a contribution from Samsung in 2016. Even at half NOK’s typical royalty rate, Samsung should add over €100 million to Technology revenues,” the BMO Capital Markets report stated.

The EPS estimate for 2016 has been raised from €0.29 to €0.31.