Since I talked about Nokia back in May of last year, a lot has happened with the company. Let me throw up a one year chart for your viewing pleasure:
As you can see, it hasn’t been a good year for the Finnish phone maker. What’s happened over the past year?
In the early part of this year, Nokia finally decided to scrap their operating system for smartphones, choosing to enter into a partnership with Microsoft to use their Windows Mobile operating system. The stock promptly dropped 13% on the news. The market wanted Nokia to partner with Google’s Android operating system, but Nokia got a much better deal from Microsoft.
Nokia has missed profit expectations badly twice in the past year. Each time they missed the stock sold off at least 10%. The market is nervous about Nokia’s results, and it shows each time the company has a hiccup.
Their networking division (which is a partnership with German company Siemens) is in the process of acquiring Motorola’s networking assets. This sale was supposed to be completed at this point, however it’s being held up by a Chinese partner of Motorola’s. This deal should close sometime in the 3rd quarter.
Led by new CEO Stephen Elop, Nokia is trying to turn around corporate bureaucracy that was evident over the past few years of failures. The Window’s decision was made quickly. Many of the key people working on the old operating system has been reassigned to come up with cool new things for future models, including the next operating system.
Even Cheaper Than Before
I liked Nokia at over $9, and I really like it under $7.
Nokia sold 450 million mobile phones in 2010. In comparison, Apple sold less than 10% of that total. Nokia still dominates the emerging markets, which still have all sorts of room to grow. Most people in China simply can’t afford an iPhone. This is where Nokia comes in.
Nokia is so cheap that rumblings are starting to happen that they’ll be purchased. A rumour circulated around the interwebs last week that Microsoft was interested in buying the company. Other companies could be interested in just the handset division, looking to buy while the stock is beaten down. According to Bloomberg, the company is worth 52% more broken up into its parts. The Bloomberg article goes on to say that Nokia is cheaper than 10 of it’s largest rivals from an EBITDA perspective.
The company continues to pay a dividend, however investors are skeptical that it’ll continue. The company also will no longer offer full year guidance, which is usually a bearish signal.
The Balance Sheet
The balance sheet continues to look great.
The company is sitting on over 11 billion in cash, and only has a little over 4 billion in debt. 7 billion net cash represents over 25% of Nokia’s 25 billion market cap.
The company trades at approximately 2 times book value. In comparison, RIM trades at 2.2 times book, Motorola at 1.47 and Apple at over 5 times. Each of those other 3 companies are completely debt free. From a purely book value perspective, there are better places to be. However, none of those names are as beaten up as Nokia.
The company made $0.09 per share in the first quarter of 2011, pretty much identical compared to the first quarter of 2010. Sales were up a bit from 9.5 billion to 10.3 billion, meaning that margins have taken a hit. This is what the market is really concerned about. Well, that and Nokia getting their asses kicked by better smartphones. How many of you own a Nokia smartphone? Exactly.
The network division keeps chugging along, giving a nice boost to Nokia’s bottom line.
I bought Nokia back in 2004, and sold a couple of years later for an almost 100% return. Back then, Nokia was struggling because they were lagging behind a hot product, (Motorola’s RAZR. Remember that thing?) and the struggles that brought both sales and margins. Sound familiar?
I think this is a great opportunity to pick up Nokia. The stock has such low expectations that even a small beat could really boost the price. Carriers will be quick to pick up the Nokia smartphones as an alternative to Apple and Android. And with time, Nokia will become the sexy name again. And once that happens, we could easily see a triple or quadruple from these depressed levels. I plan to average down soon.
Disclosure: Author owns shares in NOK and plans to purchase more in the next 72 hours.
Edit: Doubled down my existing position in NOK on Wednesday June 8th at $6.29 per share.