DCF on Nokia... Time to Sell?

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By kvanderh
May 9, 2001

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I have spent the last couple weeks (as I watched the price of Nokia move up) wondering if now might be the time to sell, as Seansan mentioned in an earlier post. We should be keeping our eye on "valuation." The name of this game is to make money, after all!

Anyway, on to my results of the discounted cash flow (DCF) analysis.

I got the average P/Es for NOK over the last 5 years to be as follows:

Year   Hi P/E   Low P/E
1996    24.6       13.4
1997    23.7       12.3
1998    37.3        9.4
1999    86.0       21.0
2000    82.2       36.3
Avg     50.8       18.5   Today's P/E = 42.73

I truly think that the high P/E of the last 2 years was/is unrealistic today. I do however believe the market is still full of irrational exuberance.

NOK earnings today is $0.77. In their Q1 2001 they estimate growth this year to be 20% and 25-30% for 2002.

Scenario #1 NOK will grow at 20% for the next 5years, they will trade at their high P/E of 50. I want 10% return on my money over 5 years.

($0.77)(1.20^5)=$1.92 earnings in 5 years. P/E of 50 will equate to a price of $96. To get my 10% growth a year I discount back to get $96/(1.10^5)=$59.63 price today. Heck, we have lots of room before we hit that target.

Now, look at the assumptions again. I don't think this even remotely possible but I thought I would put this in just for fun.

Scenario #2 NOK will grow at 20%, but trade at the low end of the P/E average 18.47. I still want growth of 10%.

My intrinsic value for the stock with these assumptions is $22.02 today. These seems more realistic but if we get 20% growth for 5 years chances are the market will give its P/E more of a premium.

Scenario #3 I will add a margin of safety to the estimate growth. Things are bound to go wrong somewhere, and let's face it... NOK is getting to be a pretty big boy Market Cap wise so growth of 20% will become tough. My margin of safety will be 25%, therefore I will use:

Growth 15% over 5 years, P/E in the middle at 30 and my return of 10%. This gives me a price of $28.88 today.

Scenario #4 Last one, I promise. This is my preferred most optimistic scenario. I want a 50% margin of safety on management guidance for growth so I use:

10% growth, P/E of 25 (maybe too high but....) and a return of 8% (I dropped this since Buffet mentioned in his last shareholder meeting that expecting more than 6% growth over the next 10-15yrs may be the most we can expect). With these assumptions I get an intrinsic value for NOK to be $21.09. Anything below $21.09 is gravy.

Now of course these are my estimates (I wouldn't even dare gamble on scenario #1 or a growth of 20% over 5 years) and it is hard to factor in all the other essentials that go into choosing a great stock. I use this as a guideline once I have determined the company to fit my needs and pass my criteria. BTW I didn't factor in the NOK dividend, which sits at 0.76% today.

NOK is an exceptional company. Lots of cash and very important (BIG BIG BIG) they have 1st class management. I may never get in on NOK at the $21.09 price but I have a list of companies with my comfort level intrinsic value calculated. I feel that the market will always let me in on one or two bargains if I let it come to me.

My conclusion is that I will probably be selling my NOK (sniff) because I think the chances for a decent (8-10%) return and some level of safety is not there. I would like to mention again that I believe NOK is top notch, but the price today leaves little room for error or a turn in the economy. Please don't remind me that NOK was north of $60 not long ago, I should have sold then but..... So, I have taken that as a lesson and have tried to modify my approach to investing. (I am trying to learn from my mistakes.) :(

Any thoughts?