2 Reasons Nokia Corporation (ADR) Is Doing Better Than You Think

By Markets Fool.com

Image source: Nokia

Continue Reading Below

Nokia , the Finnish legend of mobile history, reported fourth quarter earnings last week. Its handset division a distant memory, now under the care ofMicrosoft, Nokia is navigating uncharted waters these days.

If you thought Nokia would be struggling in this revamped network infrastructure model, you'd be dead wrong. The company is doing better without the struggling phone hardware unit, and the stock seems poised to treat shareholders well over the next few years.

These two big takeaways from the earnings report will show you what I mean.

Nokia really is better off without handsets
Nokia offloaded its Devices & Services division to Microsoft about a year go. At the time, the handset business was in freefall. Sales had declined 29% year-over-year, saddling Nokia with a negative operating margin for the division. In other words, the once-fabled handset brand faded faster than the company could dismantle the cost structure around it. Nokia was burning money here.

But there is nothing wrong with the remaining Nokia business, which is centered on its old infrastructure network partnership with Siemens. The continuing operations delivered a 9% revenue gain in the fourth quarter of 2014, coming in at $4.3 billion.

Continue Reading Below

Under Microsoft's stewardship, Nokia Devices and Services has continued to struggle. During the fourth quarter, sales fell another 23% below what they had been under Nokia and reduced Microsoft earnings by $0.08 per share.

On the other hand, the Nokia networking division knows how to make money. In the year-ago quarter, adjusted operating margin stood at 11.8%. This year, the figure has risen to 13.8%.

Net earnings increased by 12% to $0.11 per share, and Nokia's cash-burning habit turned into $150 million of free cash flows.

So don't cry for Nokia handsets. The Finns simply cut loose an underperforming business unit, doubling down on the real money-maker instead. It was simply the right thing to do.

The Finns love American money
Nokia is also making the most of the rising value of U.S. dollars.

Nokia Networks saw a surge in orders from North America in recent quarters, coinciding with rising dollar values. To be clear, the dollar rose about 20% against the euro over the past year, but North American sales at the company, as translated into Euros, nearly doubled year-over-year:

Source: Nokia

Since Nokia reports results in euros, the company tends to benefit from a strong dollar. Selling a million-dollar network switch to an American telecom at the end of 2013 would have been worth about 740,000 euros. Selling that same switch a year later would have been worth almost 900,000 euros, with exchange rates being the only difference.

Now, the dollar-to-euro exchange rate has other implications for American Nokia investors as well. Buying and selling Nokia's American depositary receipts is done through that currency exchange lens. The ADR and the underlying Nokia stock from the Helsinki market can behave very differently indeed.

The dollar started taking off in the summer of 2014, and here we can see how the currency fluctuation affected Nokia shares. The red line represents the original Finnish shares, traded in euros, and the blue line shows the dollar-denominated ADR:

Source: Google Finance

Of course, I'm not saying that all Nokia investors should convert their holdings to the original Helsinki shares. Sure, you would capture this value boost, but when you sell your Nokia stock, you would still have to eat that currency exchange difference before having the cash in hand.

This amounts to gambling on currency exchange trends, and you never know where those rates are going next. Timing the market is a losing game, and that goes doubly so for currency traders. We should focus instead on how the reported exchange rate moves have boosted Nokia earnings and stick with the ADR papers we already know. For all intents and purposes, they're as good as a straight-up share certificate.

Nokia still has a lot of ground to make up in North America. Europe and Asia are much larger markets, but none of them can match the growing pace of American sales.

With or without the currency exchange effects, the Finnish company is making a strong push into America just as 4G LTE mobile networks are starting to mature. There are several major wireless spectrum auctions on the horizon or just completed, setting the stage for next-generation 5G upgrades.

This would be a great time to build a credible American carrier-grade network business, which is exactly what Nokia is doing. And doing it without the handset division weighing it down only makes the future for Nokia look even brighter.

The article 2 Reasons Nokia Corporation (ADR) Is Doing Better Than You Think originally appeared on Fool.com.

Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.