Once upon a time, Nokia (NYSE:NOK) bestrode the telecommunications world like a titan, boasting a powerful brand name, and the best market share in cell phones -- anywhere.

But that, as they say, was then, and this is now. Today, Nokia is basically out of the cell phone game, having sold what was left of its handset business to Microsoft, and refocused its business on telecommunications infrastructure instead. To bolster its new business, Nokia announced in April that it will acquire its archrival, Alcatel-Lucent (UNKNOWN:ALU.DL). The deal, although paid for in Nokia shares, is expected to cost Nokia the equivalent of $16.6 billion.

But one analyst thinks it's worth every penny -- and more.

Credit Suisse gives Nokia a lot of credit
Bright and early Tuesday morning, Swiss megabanker Credit Suisse announced a trio of new ratings in the telecoms sphere, upgrading shares of both Nokia and Alcatel-Lucent from neutral to outperform. (According to the ratings watchers at StreetInsider.com, CS simultaneously downgraded Nokia rival Ericsson (NASDAQ:ERIC) from neutral to underperform).


In a nutshell, Credit Suisse thinks that the merger with Alcatel is going to be a whole lot more profitable for Nokia than Wall Street expects. In fact, in its note Tuesday, CS argued that consolidating the wireless infrastructure market will cut costs and reduce price competition, boosting earnings before interest and taxes for the combined company by as much as "double" current levels, by 2018.

But what does that mean exactly?

Valuing Nokia ... and Alcatel, too
According to data from S&P Capital IQ, Nokia generated pre-tax operating profits of $1.65 billion over the past 12 months. Alcatel-Lucent, albeit unprofitable on its bottom line, generated pre-tax profits of just under $700 million. Were the two companies already merged today, we could estimate Nokia-Alcatel 's combined annual pre-tax profits at roughly $2.35 billion. And if Credit Suisse is right about that number "doubling," then we could see these profits surge to $4.7 billion within three years.

Now let's assume that Nokia's net profits in 2018 will bear roughly the same relation to pre-tax operating profits that they do today. Admittedly, that's a big assumption, but if correct, it would mean that 75% of operating profits drop to the bottom line, and net earnings, three years from now, could hit perhaps $3.6 billion.

Weighed against those profits will be Nokia-Alcatel's own market capitalization. With Nokia currently costing $26.6 billion, and the value of the Alcatel merger estimated at $16.6 billion, this all implies a market cap of perhaps $43.2 billion for the combined company. So the P/E based on today's valuation would be $43.2 billion divided by $3.6 billion, or 12.

That hardly seems liken a lot to pay for what will soon be the world's dominate telecommunications infrastructure maker -- especially if Credit Suisse is right about profits doubling in three years' time, which implies about a 26% annualized earnings growth rate.

Is Credit Suisse right?
That's the real $64,000 question: Not just "Is Credit Suisse right to upgrade Nokia and Alcatel (and to downgrade Ericsson)"? But more important, :Is Credit Suisse doing its math right, correctly guesstimating how many synergies Nokia will be able to squeeze out of the Alcatel-Lucent merger, and how quickly will the merged company grow profits, once Nokia and Alcatel are acting in concert and no longer competing one against the other?"

Fortunately, the odds look good here as well. According to data from our own Motley Fool CAPS database -- where we've been tracking Credit Suisse's performance for nearly a decade now -- this banker ranks in the top 10% of investors we track. What's more, over the years, Credit Suisse has published affirmative buy/sell calls on Ericsson four times, Nokia thrice, and Alcatel just once. Here's how those picks fared:



Credit Suisse Said:

CAPS Says:

Credit Suisse's Picks Beat (Lagged) S&P By:




99 points




(27 points)




(40 points)

As you can see, Credit Suisse is far from perfect on its picks. But on balance, the analyst's recommendations on these three telecom giants have outperformed the market -- and Credit Suisse has done best on the firm that will emerge on top from the Nokia-Alcatel merger: Nokia.

Between the analyst's record, and the attractive valuation it posits for Nokia stock once all the synergies are factored in, and all the growth has arrived three years hence, I have to say: On balance, I'm inclined to think Credit Suisse is right: Post-merger Nokia looks like a winner to me.