At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
When Nokia (NYSE: NOK ) announced its tie-up with Microsoft (Nasdaq: MSFT ) Friday, and the shares promptly plunged 14% in a day, shareholders might have thought that their situation couldn't get any worse. Alas, it did.
After taking the weekend to ponder the situation, three of Wall Street's best and brightest decided this morning that the news deserved a downgrade for Nokia. JPMorgan Chase knocked the stock all the way down from "overweight" to "underweight," while Cowen downgraded from "outperform" to "underperform." HSBC would have loved to slice Nokia a couple of notches, too, but since it already had the stock rated "neutral," it could only lower Nokia the rest of the way to "underweight."
Whatever you name it, though -- underweight, underperform, underimpressed -- Wall Street is saying it's time to throw in the towel on Nokia. Are the analysts right?
Maybe so
When Nokia tied up with Microsoft, it basically admitted that its multibillion-dollar bet on the Symbian operating system is a bust. Symbian cannot compete with Google's (Nasdaq: GOOG ) giveaway of the Android operating system, nor with Apple's (Nasdaq: AAPL ) instantly dominant iOS. To survive, Nokia needs a partner, and it's chosen Microsoft.
Clearly, Wall Street disagrees with that decision -- but really, what alternative did Nokia have? A lot of folks seem to think the company would have been better off following Motorola's (NYSE: MMI ) and nearly every other non-Apple phone maker, and begun building Android phones. But really, that would have been just as bad for Nokia.
Perhaps switching to Microsoft was an admission that Nokia was a sucker for Symbian. But switching to Android would have had just as dire implications for the billions Nokia anted up for Navteq back in 2007. It also might have called into question the multiyear contract Nokia signed with Garmin (Nasdaq: GRMN ) to license the latter its Navteq maps -- since Google gives mapping ability away for free with its OS. Any way you look at it, Nokia had no good options.
When all you've got is lemons, don't try to make Apple cider
Caught in a Catch-22, I actually think Nokia made the best deal it could have, under the circumstances. Sure, it's going to have to pay licensing fees to Microsoft to use the latter's OS, but as Nokia CEO Stephen Elop explained this morning, Nokia's also getting billions in "financial support" from Microsoft as an inducement. Add in the cost savings of not having to keep Symbian up to date, and this could actually turn out to be a moneymaker for Nokia.
None of this is swaying the skeptics. This week, the forests of Finland are full of bears, with nary a bovine in sight. They seem convinced that in today's smartphone market, there's room for only two players: Android or Apple. (The last time I checked, Research in Motion (Nasdaq: RIMM ) phones did not come equipped with either OS, and RIM's doing just fine.) Isn't it just possible that Nokia will survive this predicament as well?
A modest, Foolish suggestion
Before you decide to sell your shares and go hide in a cave, pause for a moment to consider the opposing argument here. Let's consider why Nokia might -- just might -- actually be a "buy" today.
Right now, Nokia shares sell for just 13 times earnings. Because these earnings do not fully reflect the amount of cash that the company generates from its business, though, the shares' true value is much cheaper. Viewed from the perspective of its free cash flow, Nokia sells not for the 13 multiple its P/E suggests, but for a much lower price of just six times free cash flow.
Now, maybe you look at analyst estimates, which basically conclude that Nokia will struggle to achieve even 7% annual earnings growth over the next five years, and think that price is appropriate. I look at the low price on Nokia shares today, and consensus estimates that the rest of the cell phone industry will grow by more than of 18% per year, and wonder what happens if Nokia can find expand at anything approaching this "normal" rate -- or even just a better fraction of it.
At half the normal rate -- 9% growth, say -- it seems to me that Nokia shares are a bargain at six times free cash flow. At 12%, they're even cheaper. And even in the worst-case scenario of sub-7% growth, where Nokia shares look at least fairly priced, the company also pays you a 4.2% dividend for sticking with it through the hard times. Honestly, Fools, it seems to me the bears have overplayed their hand today. Barring corporate Ragnarok, I think Nokia will come out of this mess looking bright and shiny.
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