Is $NOK Becoming Too Cheap?

by on June 14, 2012

in Mid Cap Value Stocks, Public

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Nokia (NOK) started today with the news that it is cutting 10,000 jobs by the end of 2013 and increased its loss guidance for the second quarter. The stock is down to $2.34/share or about 16% on the news.

Sadly, this has become a familiar story for Nokia over the last year or so, as the company continues to lose its market share in the handsets to Apple, Samsung and other mobile device makers. The story is being played out similar to Ericsson. Ultimately, Ericsson joined forces with Sony. The problem with merging two weak businesses is, that the result will still be weak and so it panned out for Sony-Ericsson. What then is in Nokia’s future?

The Stock is Cheap

At the current market prices, the stock is trading at 60% of the book value and 1.36 times the tangible book value. The company is valued in the market at about $9 Billion and has $13 Billion in cash and marketable securities on the books. From a balance sheet perspective, if the company closes its factories and disposes off assets, it will raise more cash (although it remains to be seen if they can fetch prices above the book). At 1.4, the current ratio seems a bit inadequate, but when the sales are declining steadily, the operating liquidity is not really a problem.

Essentially, the company is in no immediate danger of going bankrupt and has valuable assets.

The Problem with Nokia

The problem with Nokia is mainly on the margins. Its sales have declined around 30% from 2007 and the costs have not gone down proportionally. Increasing competition also means their gross margins have been trimmed down to 33% for what used to be as high as 45% in mid 2000s. The margin pressures have become more pronounced as the competition has intensified and the pricing power for Nokia has decreased.

Platforms and Networks

For an incumbent like Nokia, it feels a bit strange to talk about barriers to entry. Perhaps a better phrase would be the cost of acquisition of a new customer, however, most of the customers that they need to win back are the ones they used to have in the past. iPhone and Android ecosystem has grown rapidly and captured a significant market that is difficult to penetrate as the customers typically have high costs of switching as they get used to the apps and the features that these platforms provide. The barrier becomes stronger as these networks grow. It is unfortunate that Nokia’s Symbian system did not adapt to the changing Smartphone landscape, despite being a much earlier player in the space.

The Way Out

Nokia still possesses a formidable hardware capability. It just needs a push in regaining market share to become profitable again. Aligning with one of the emerging competitors in the Smartphone OS market may be one of the ways to get there. Microsoft for example, is making a serious push with its Windows Phone and they have already invested in Nokia, so a deeper strategic partnership is not out of the question (including an outright acquisition of Nokia). Another company that is hoping to leverage its existing network and launching a Smartphone is Facebook.

Bottomline

The stock is cheap and the assets are valuable. Some believe that its patents by themselves are worth $2.3/share. Unless Nokia aligns itself with one of the emerging players that has the marketing muscle or existing network to take on the iPhone/Android user base, it will continue to be difficult for Nokia to compete. This way they can also leverage some of their existing capabilities in the OS development. The other option is to become a pure play hardware supplier and hop on to Android bandwagon

There is a good possibility that Microsoft (MSFT) or Facebook (FB) might make a play for the company, given its patents and global presence.

I will mark the stock down as a good buy at the current prices, but a little on the speculative side.

Leave a Comment

pbanik June 15, 2012 at 5:04 am

http://financials.morningstar.com/valuation/price-ratio.html?t=NOK&region=USA&culture=en-US
http://www.results.nokia.com/results/Nokia_results2012Q1e.pdf
http://www.fool.com/investing/general/2012/06/14/nokias-last-cut-is-the-deepest.aspx?source=itxsitmot0000001&lidx=1
http://seekingalpha.com/article/661391-consider-this-strategy-before-you-buy-nokia?source=yahoo
Price/Book and Price/Sales ratios make it look cheap, but with the stock price plummeting, I’m wondering if it will be purchased by Facebook or Microsoft, or it will be a casualty like Nortel. The fact it laid off 10000 workers is not a good sign.  Have you looked at Ericsson? That might be another company you might want to look at as a comparison. Right now, they seem to be a safer bet for now. It’s pretty much speculation with Nokia at this point.

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ShaileshKumar June 15, 2012 at 10:06 am

 @pbanik We will have to wait and see. There was a Bloomberg story today saying private equity might be getting interested as well.

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pbanik June 16, 2012 at 3:45 am

 @ShaileshKumar 

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pbanik June 16, 2012 at 3:50 am

 @ShaileshKumar  Another company that I was wondering about is Research in Motion. Motley Fool did a feature on both companies:
http://www.fool.com/investing/general/2012/06/15/battle-of-the-duds-rimm-vs-nokia.aspx Their situation seems to be in a similar plight to Nokia at the moment.  The author of the article would pick Nokia over Research in Motion, if she had to choose between the two. 

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ZingfinTech June 16, 2012 at 11:50 pm

@arohan The only issue is, apart from Microsoft nobody else might be interested in $NOK patents, ass Goog already made a big purchase

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arohan June 17, 2012 at 12:11 am

@ZingfinTech $FB is an outside chance. They have been throwing money around on acquisitions and have expressed a desire for Facephone

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ZingfinTech June 17, 2012 at 1:14 am

@arohan But, $NOK is still too big, has too much cultural difference with silicon valley. Will be very hard for $FB to assimilate.

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arohan June 17, 2012 at 1:21 am

@ZingfinTech Good point about the culture. It doesn’t have to be an outright acquisition though. A patent deal, or JV investment …

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MikeTsangaris June 19, 2012 at 4:02 pm

 @arohan since the article $NOK is up around 8% so you might be right that it has become too cheap, considering its discount to book but perhaps it is a near-term bottom (until next few quarterly results). Job cuts, decreased demand and heavy dependency on the $MSFT partnership and as you point out the decrease in margins are all negative signs. I would prefer to avoid the “how much lower can it go?” argument and the takeover thesis and invest elsewhere.

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ShaileshKumar June 20, 2012 at 8:31 am

 @MikeTsangaris Yes, the company has to make sense on its own as an investment and until the picture clears a little bit more, it is difficult to make a thesis. It is at this point a speculative investment

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ShaileshKumar June 28, 2012 at 1:45 pm

 @MikeTsangaris  @arohan It has been downhill since then. It is spec play so let’s see how it pans out.

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MikeTsangaris June 20, 2012 at 8:45 am

@arohan really easy to read article with good points. I agree with you that it was a good buy at around that price but a bit spec

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arohan June 20, 2012 at 11:04 am

@MikeTsangaris Thanks Mike!

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