Nokia’s stock has fallen 35 per cent this year as the mobile-phone maker’s outlook has soured investors’ sentiment. A recent deal with tech-titan Microsoft , through which Windows will power Nokia’s phones, hasn’t turned the tide. But, with an 8.6 per cent yield and a cost of only six-times cash flow, Nokia’s stock is becoming attractive.
Finland’s Nokia is the world’s largest mobile-phone manufacturer. Despite the stock drop, the company has an impressive product lineup and outstanding emerging-market exposure. Nokia generates just 3.8 per cent of its sales in the U.S., compared to nearly 17 per cent in China, 7 per cent in India, 4.1 per cent in Russia and 3.6 per cent in Brazil.
Nokia cut its second-quarter revenue guidance shortly after reporting its first-quarter results, which sent investors running for the hills. The company’s share price has tumbled by 19 per cent in just five trading sessions. Adding insult to injury, Goldman Sachs reduced its rating on the stock to “neutral.”
Warning that downside risks now outnumber upside catalysts, Goldman cited a paltry cash balance, at just €6-billion, and rapid market-share losses as reasons to steer clear of Nokia. But from a valuation perspective, it’s never been a better time to buy. Nokia has extremely valuable overseas assets and may attract buyout interest, given its equity’s recent tailspin. Rumours have been circulating that Microsoft tendered an offer of $19-billion for the company’s mobile operations. Some have gone as far as to suggest a 50 per cent premium in a buyout scenario.
One thing is certain, the company’s woes and cheap stock, coupled with record cash on tech balance sheets, amplify the likelihood of a buyout or break-up, confirming the value of each share’s assets. Currently, a Nokia share costs a book-value multiple of 1.2, a sales multiple of 0.4, a free-cash-flow multiple of 5.7 and an enterprise-value-to-EBITDA ratio of 3.3, 73 per cent, 90 per cent, 75 per cent and 78 per cent discounts to technology industry averages. But, some investors say sum-of-the-parts analysis is useless as Nokia is in a down leg.
Nokia’s revenue and net income have declined by 10 per cent and 39 per cent, annually, on average, since 2008. Currently, just five, or 16 per cent, of the researchers evaluating Nokia rate its stock “buy” or “overweight” while 18, or 58 per cent, recommend holding and eight, or 26 per cent, advise clients to sell. Just one of the bulge-bracket banks, Barclays, is bullish on Nokia, rating the stock “overweight” with a lofty $10 target, suggesting 50 per cent of possible upside. Barclays, previously expecting a margin bottom in the third quarter, has pushed that estimate out to the fourth.
Conceding that “lower Q2 guidance and Nokia’s withdrawal of its 2011 view leads our estimates materially lower,” Barclays says that “despite this, we believe WP7 (Windows Phone Seven) will support a recovery in fundamentals. Shares may languish as the market seeks an end to negative estimate revisions, but we expect evidence of the bottom by late 3Q/early Q4.” As this evidence surfaces, Barclays expects investors to bid the stock to roughly eight-times its 2013 earnings estimate, or $10 a share. Barclays cut that target from $11 on June 1.
Tech enthusiasts criticize Nokia’s product design and its new partnership with the lumbering Microsoft. Fearing the second coming of Motorola, whose mobile global market share dropped from a peak of 26 per cent in 2006 to about 3 per cent, currently, they are deserting the stock. But, Nokia is no Motorola. It has surrendered market share, which has fallen from a peak of 40 per cent in 2007 to about 24 per cent last quarter. Yet, unlike Motorola, Nokia has much more diversification in its geographic and customer base, and stands to regain market share with Windows Phone 7 launches.
Barclays believes that “the opportunities for Nokia to regain market share are greater than at Motorola, because the former has maintained its presence in all major markets with all key customers, unlike the latter, which pulled back in a number of areas.” One more concern of investors on the fence is the sustainability of Nokia’s dividend. The American Depositary Receipts (ADRs) currently pay an annual distribution of 57 cents, currently translating to a yield of 8.7 per cent. The dividend fluctuates and is down from a high of 83 cents, which was paid in the first quarter of 2008.
Barclays didn’t forecast the dividend for 2012, but Bloomberg consensus is currently at 58 cents, suggesting a modest increase. Despite falling during the recession, the dividend has grown a reassuring 8 per cent, annually, on average, over a five-year horizon.
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