3 Reasons Nokia Investors Need to Adjust Their Expectations

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In the last year, Nokia Corporation's (NYSE: NOK  ) stock has roughly doubled. The challenge for investors in a stock that jumps this much in a year is answering the question, "where do we go from here?" Nokia has agreed to sell its Devices & Services business to Microsoft for about $7 billion. While this was seen as a huge win for Nokia, now what? Looking at the company's most recent earnings, there are at least three reasons investors need to bring their expectations back to reality.

Nokia can't wait for Microsoft's money
Prior to the close of the sale of the Devices & Services business, Nokia looks like a poor value relative to a few of its peers based on its cash-to-market-cap percentage. A good way to find potentially undervalued companies in the same industry is by comparing their net cash to their current market cap.

A few of Nokia's peers offer much more compelling values by this measure. For instance, Juniper Networks (NYSE: JNPR  ) currently has about $3.2 billion in net cash and investments, which is the same amount Nokia carries on its balance sheet. The huge difference is Juniper's cash represents 24% of its current market cap, whereas Nokia's cash only represents 10% of its current market cap.

Cisco Systems (NASDAQ: CSCO  ) is another competitor that offers investors a far superior percentage of its market cap as net cash. Cisco reported almost $35 billion in net cash and investments, which is more than 30% of the company's current market cap.

Nokia says it expects to improve its debt profile, and may return some of the proceeds from Microsoft to shareholders. A special dividend would be a short-term positive. However, the first reason investors need to adjust their expectations is, with the stock up 100% already, this potential cash distribution is likely already priced into the stock.

3 Times Worse
The second reason investors may need to adjust their expectations is relative to its peers, the company's stock is a significantly worse value. First, Nokia pays no dividend, whereas Juniper just instituted a dividend yield of 1.5%. Investors looking for a better yield might consider Cisco's 3.5% yield.

Of these three companies, the growth champion is Juniper. In the next several years, analysts expect annual earnings growth of almost 14% from the company. Even though Cisco is going through some challenges, the company is expected to report better than 8% earnings growth in the next five years.

In the most recent quarter, Nokia reported sales declined in all six geographic regions. In addition, the company's NSN division reported a sales decline of 22% and this one division represents almost 90% of the company's total revenue. These challenges are expected to continue as analysts expect annual earnings growth of just 5% over the next few years.

As if no dividend and a lower earnings growth rate wasn't bad enough, Nokia also sells for a forward P/E ratio that is 57% higher than Juniper and 146% higher than Cisco. As you can see, Nokia's stock is anything but a great value at current prices.

By the numbers
The third reason investors need to temper their expectations is Nokia's current market cap is a bit hard to justify. With a nearly $30 billion market cap, we know that the Devices & Services business is worth $7 billion since that is what Microsoft is paying. Subtracting this value, we have $23 billion left to account for.

The company's NSN business has a better growth profile and better margins than the Devices business, so let's be generous and NSN is worth twice what the Devices business sold for. With similar sales and a better margin, maybe that makes sense. If that is the case, NSN would be valued at $14 billion. Taking $14 billion from the $23 billion leaves $9 billion left.

To suggest Nokia's HERE and Advanced Technologies businesses are worth $9 billion with just under $500 million in sales, is a huge challenge. This valuation would suggest that these two businesses combined are worth 18 times sales. Devices & Services sold for about 2 times sales, and NSN might be worth 4 times sales, but thinking Nokia gets 18 times sales for the rest of the company is a challenge indeed.

The bottom line is Nokia made a smart move by selling its Devices & Services business. This business has a better chance of succeeding under Microsoft. However, investors have become so enamored with what Nokia could be, they forgot to see what Nokia is. The company may do better in the future, but it appears most of this is already built into the stock's value. Smart investors should probably avoid the shares at these prices.

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Comments from our Foolish Readers

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  • Report this Comment On March 10, 2014, at 8:41 PM, jeffreber44 wrote:

    I don't buy your argument one bit. Your missing all the reasons why Nokia will be successful. For one Nokia has already started gaining business for is NSN division, which is the most pressing issue analysts had. All the other things are gravy for the most part. And boy oh boy, slap on that gravy.

  • Report this Comment On March 10, 2014, at 10:14 PM, sZed wrote:

    Didn't you forget something: patent income? That should add revenue of about US$ 1B this year -- which should easily take the valuation up to the current level or more.

  • Report this Comment On March 10, 2014, at 11:35 PM, ajaykc wrote:

    Author says" To suggest Nokia's HERE and Advanced Technologies businesses are worth $9 billion with just under $500 million in sales, is a huge challenge. This valuation would suggest that these two businesses combined are worth 18 times sales. Devices & Services sold for about 2 times sales, and NSN might be worth 4 times sales, but thinking Nokia gets 18 times sales for the rest of the company is a challenge indeed."

    Where did you get those numbers? Did those numbers come out of your hat? Just patents made more than Euro 529m for 2013 fiscal year. Multiply that by 1.35 to convert that into dollars ($714m). HERE maps made Euro 914m ($1233m) for 2013 fiscal year (all numbers from 2013 full yr results).

    Please answer where did you get your numbers from? If you can't then stop misleading people. I wasn't intending to comment here but I feel agitated when I see poor articles published without fact checking.

    Yes, Nokia is selling handset division. No doubt, everyone was crying that division was loss making. NSN is growing and if you haven't seen new contract wins then you shouldn't even try to write anything. HERE maps was powering 10m cars in 2013 and car sales are supposed to grow even further. HERE maps were making loss to make phone business look little better by undercharging for HERE services on WPs and S30 devices. Even if HERE charges only $5/smartphone for offline maps, they can easily make $50-75m/qtr at current run rate and very easily can make a lot of money from advertising on HERE assets. The importance of maps/navigation on phones is growing faster than you can imagine. In fact, I can say, a phone can't be called a smartphone if it is missing navigation system. I don't know Juniper and Cisco that well so I wont comment but Nokia is still undervalued.

  • Report this Comment On March 11, 2014, at 12:16 AM, wwu12345 wrote:

    Very poorly made argument, based on cash to market cap. Furthermore, do you know that Nokia will have more than $10B in net cash post MSFT deal? You may say that the deal is not closed yet, but, is it true that current price should reflect future prospects with risk considered? Another major poor argument is that NSN is worth twice D&S value based on MSFT deal of $7.2B. Why NSN is worth twice of D&S? They are totally difference business. What is your reasoning? Without a reason, you just threw a random number "twice" around. Also, do you know that MSFT paid only about $5.2B for D&S, not the $7.2B you quoted? Do you know that the other $2B was for MSFT to licence Nokia's IP and HERE for 10 years? You don't really understand MSFT deal, is this true? If your "twice" is correct, you would have value NSN at only %10.2B. Do you know that in 2014 NSN had sales of $15B and operating margin about 10%, which is higher than the operating margin of ERIC? If we use ERIC's metric of p/s = 1.25, then NSN is at least worth about $18B. How about Nokia's IP, which will bring in licence fee of $0.8B in 2014. Is it worth at 10X for a value of $8B? Now, I have not even added HERE, and it is already worth $36B. When you add all the parts, Nokia is worth $40B right now, and this is not an aggresive price.

  • Report this Comment On March 11, 2014, at 1:28 AM, 2uredrose wrote:

    This article is indeed poorly written. The author states that "Nokia's cash represents 10% of it's market cap." That means the author knows that current cash is 3 billion. So if Msft deal is worth 7 billion, then you need to subtract 7 + 3 billion from the current market cap of 30 billion. That leaves 20 billion for which to account, not 23 billion. Ah, but nevermind, it's a slight oversight when you want to make a point "by the numbers"

  • Report this Comment On March 11, 2014, at 10:51 AM, wisdominvest wrote:

    To compare Nokia with Cisco is just foolish. Stopped reading after seeing that.

  • Report this Comment On March 11, 2014, at 11:59 AM, ahangara wrote:

    Foolish article... Waste of time.

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Chad Henage

Chad is a self professed tech nerd and has been investing for over 20 years. He follows nearly everything in the technology and consumer goods sectors, and is a huge fan of the Peter Lynch investing style. He has over 1,000 published articles about stocks and investing. You can follow Chad on Twitter at @chadscards1274.

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