Is Nokia Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Nokia's (NYSE: NOK  ) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Nokia's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Nokia's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Nokia's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Nokia managing its resources well? A company's return on equity should be improving, and its debt-to-equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that Nokia's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Nokia's key statistics:

NOK Total Return Price Chart

NOK Total Return Price data by YCharts.

Criteria

3-Year* Change 

Grade

Revenue growth > 30%

(32.3%)

Fail

Improving profit margin

(68.2%)

Fail

Free cash flow growth > Net income growth

(117.5%) vs. (545.9%)

Pass

Improving EPS

(469%)

Fail

Stock growth (+ 15%) < EPS growth

(67.7%) vs. (469%)

Fail

Source: YCharts. *Period begins at end of Q4 2009.

NOK Return on Equity Chart

NOK Return on Equity data by YCharts.

Criteria

3-Year* Change

Grade

Improving return on equity

(720.6%)

Fail

Declining debt to equity

897.3%

Fail

Dividend growth > 25%

(100%)

Fail

Free cash flow payout ratio < 50%

N/A

N/A

Source: YCharts. *Period begins at end of Q4 2009. N/A = not applicable; Nokia suspended its dividend in January.

How we got here and where we're going
It should come as no surprise that Nokia's endured a particularly brutal stretch over the past three years. Nokia can only earn eight passing grades as a result of its recent dividend suspension -- which may help boost the company's shrinking cash pile this year, but which also results in a failing grade as far as dividend growth is concerned. Out of these eight opportunities, the Finnish phone maker earns merely one passing grade, and then mainly by technicality. Is there hope for a turnaround in 2013, or is this former high-yielder hopeless in the near term?

I came together with two of my fellow Fools to predict Nokia's outperformance last summer, based largely on the fact that it was undervalued from a fundamental standpoint. After initially being rewarded with a big bounce into the new year, we've had to endure a rough patch in 2013. My fellow Fool Sean Williams gave Nokia a rough valuation range of $3.53 to $3.66 per share based on patents and other holdings, and as of this writing it's still above that level in spite of its 2013 slide. That seems to indicate a limited upside on a fundamental revaluation level, but by now the market has shifted its expectations toward smartphone success -- or failure, if the year's decline is any indication.

The breakdown of mobile market share does not tilt in Nokia's favor at present. Google's (NASDAQ: GOOGL  ) Android and Apple's (NASDAQ: AAPL  ) iOS combined for over 90% of the smartphone market in the fourth quarter. Nokia, which is leaning on Microsoft's (NASDAQ: MSFT  ) Windows Phone, shipped 4.4 million Lumias, which dominated the tiny slice of Windows Phone smartphones in the market last quarter, but was still not enough to surpass the fast-fading BlackBerry.

Nokia has at least one advantage over Apple (though this may not be as much of an advantage over Android phone makers): extensive experience in lower-cost devices. Forget about feature phones -- Nokia can push out smartphones running Windows at a lower cost than many competitors. Apple struggles in unsubsidized phone markets because the cost of most Android headsets is so much lower than that of the iPhone. The Lumia line, with its striking design features (a hallmark of Nokia's success in the pre-smartphone era), has the potential to capture significant mindshare in emerging markets like India and China. Nokia hasn't abandoned feature phones, either. Starting emerging-market users off with a $20 or $80 feature phone could be a smart brand-building strategy, especially if it transitions users to more lucrative entry-level smartphones. Apple may be seen as an aspirational brand, but that status is far from assured if the company fails to move forward in terms of design and functionality. Fashion is a fickle thing, especially when that fashion is too costly for the consumer.

Nokia is a big fish in the tiny Windows Phone pond right now. It can remain a big fish if the pond grows, but a dry season might suffocate it. This year will be a very important one for the company's future, but that future remains far from clear.

Putting the pieces together
Today, Nokia has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Nokia's been struggling in a world of Apple and Android smartphone dominance. However, the company has banked its future on its next generation of Windows smartphones. Motley Fool analyst Charly Travers has created a new premium report that digs into both the opportunities and risks facing Nokia to help investors decide if the company is a buy or sell. To get started, simply click here now.


Read/Post Comments (7) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 07, 2013, at 9:11 PM, marv08 wrote:

    "Nokia has at least one advantage over Apple (though this may not be as much of an advantage over Android phone makers): extensive experience in lower-cost devices."

    Not to be nit-picking, but Apple certainly sold more units of the iPod Shuffle than Nokia did sell Lumia phones. If Apple wants to do a low(er)-cost device, they will. If they consider the potential damage to the brand to big a risk, they won't. I don't know.

    But the real point here is: where is the proof, that Nokia is earning anything on these low-cost devices? They are far below the average smartphone ASP already, turn barely a profit, and will now have to start paying MS back. This might work out, but I have not seen even a rough calculation (even one based on reasonable assumptions) that brings this point home.

    Certainly they can improve their sales (numbers of units) by offering good value. No one doubts that. But how would Nokia financially succeed with low end devices? BlackBerry (then RIM) was selling tons of cheap Curves in the BRIC countries, and got recurring subscription money on top of that, and did not have to pay for the OS - it did not suffice. How can Nokia turn a profit on selling much better equipped devices (they are) without subscription income and while paying MS for licenses? Somebody provide a little math here, please?

    (And I am not even talking about competing with Samsung, a company with a marketing budget greater than Nokia's entire valuation, and the government-backed entries from China... all dead set to buy these markets, if necessary.)

  • Report this Comment On March 08, 2013, at 12:17 AM, ajaykc wrote:

    "BlackBerry (then RIM) was selling tons of cheap Curves in the BRIC countries, and got recurring subscription money on top of that, and did not have to pay for the OS - it did not suffice."

    I don't know if blackberry was really loosing money? I guess they were making less money than what they used to when BB was super popular. Again, BB was never a value proposition so BB was able to sell lot less phone during popular time and make more money. Now more like they sell more phones but make less money because people are not willing to pay same price.

    Nokia's case is entirely different. Nokia has always produced phones at every price point, starting from $35-700 n they also made $10,000 (vertu). Nokia's feature phones (super cheap ones) have never made a loss as they can push the volume needed to make decent profit. Smartphone division was also profitable until 2010 as they used to push a lot of volume. Symbian created a big hole which has been filled by Android in same price range except some top-line Galaxies S II and SIII and Note...

    Don't tell me BB doesn't have to pay for software, it costs money and resources to develop an OS, so its not free. Sometimes its more expensive to create your own OS than offshore it. Again, now nobody wants to pay for BBM services.

    Nokia has a lot more assets than anyone in that industry. More than 30k patents, making almost a 700-900 million a year from patents alone. Many cases are still in court. Nokia's mapping system is the best in the industry and it makes money. Networking business is now profitable. NSN is winning 3G and 4G LTE contracts every other day.

    The thing is...US business media is very biased towards Nokia, I still scratch my head for reasons. Sooner or later, things will correct itself and Nokia will start walking on its own feet.

    Again Nokia pays for WP OS and Microsoft pays back for bunch of services such as Maps and navigation, bunch of other features that Nokia brings into WP OS. The relationship is so deep and undefined that it can't be disclosed in public. So ya, I don't have any doubt for Nokia's bright future, it is just going to take some time. That's all I can say.

  • Report this Comment On March 08, 2013, at 2:51 AM, USuptick wrote:

    good article.

    Nokia is now focusing on low end smartphones. However, I wonder how they can be succesful in that market, because they don't even have dualsim available on smartphone as it is available on Samsung android phones. That's a key point to choose low end smartphone model in Asia (India, China etc.).

    High end smartphone users miss Adobe flash to watch online tv channel programs. Adobe flash is not working based on my experience on Lumia 920. So why to choose an expensive smartphone without Adobe flash support if that's available on competitor's smartphone?

  • Report this Comment On March 08, 2013, at 3:48 AM, ctyank99 wrote:

    An analyst just came out and estimated 15 million units in sales for this year alone on the new 520. Nokia just did a filing recently that said profits on services and devices will exceed 10% and stated that their production problems were now solved. They supposedly had a party in China for their 2 millionth windows phone sold, and Nokia/Siemens announced five new contracts in the last month. Nokia will survive and thrive. They’ll be a classic turn-around story.

  • Report this Comment On March 08, 2013, at 6:31 AM, USuptick wrote:

    ctyank99,

    you're kidding. Nokia says its long term 10% profit target to be on services and devices. If they don't specify time frame exactly it is sounds same as wishes and wishes.

    Could you please also link an official statement from Nokia, where they're saying that their production problems are now solved. Without that we don't, honestly, believe you.

    Finally, Apple and Google, they are creating new customer user experiences. Do you claim that it is Nokia? Typically, those cue creators are also winners in the mobile market. The history has demonstrated this very well, several times.

  • Report this Comment On March 08, 2013, at 7:15 AM, Matt8265 wrote:

    One thing NOK has going for it ... it isn't an American company that the ROW hates.

  • Report this Comment On March 08, 2013, at 1:37 PM, Rake80 wrote:

    I say don't count NSN out ;)

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2299519, ~/Articles/ArticleHandler.aspx, 12/18/2014 8:45:59 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement