Nokia is in the right place at the right time, but it’s been torpedoed by bad management. Nevertheless, recent changes should reward investors.
Firstly, in September the firm appointed a new CEO, Steven Elop, a veteran of the software industry. This seems sensible. Elop is a Canadian citizen. So he should be well placed to fix the firm’s long-standing difficulties in North America, where it enjoys only 6% of the market.
Next, Nokia’s main Achilles heel has been the lacklustre performance of its smartphone platform, Symbian. With 36% market share, it’s still the number-one application, but has lost its innovative edge to companies such as Research in Motion (Blackberry – 15% share), Apple (iPhone – 17%) and, more recently, Google’s Android (26%).
However, Nokia is no sinking ship. It has a gigantic portfolio of patents and is the world’s eighth most-valuable brand, being worth a whopping $29.5bn (or €6 a share), according to Interbrand. What’s needed is a root-and-branch shakeup of this sleeping giant – improved products with touchscreen capability and more apps (software applications).
Nokia (Helsinki: NOK), rated a BUY by AlphaValue
These days, phone calls are taken for granted. Users buy a smart-phone, tablet computer or netbook primarily for what else they can do. The bigger and more-user friendly the app library, the greater the demand. Research house IDG forecasts that the size of the mobile app sector will explode from 10.9 billion downloads in 2010 to 76.9 billion in 2014. That 605% leap should generate revenues of $35bn. So all Elop has to do is expand Nokia’s app base by allowing third-party developers access to Symbian. This is not rocket science. Just look at what Apple and Google have achieved.
Nokia also owns a 50:50 joint venture with Siemens. It provides vital wireless infrastructure and communication services to network operators. Given the incredible popularity of data-hungry tablet PCs, such as Apple’s iPad, many mobile networks will soon be swamped with traffic. This will force telecoms companies to upgrade their equipment. This happened a couple of years back when the iPhone brought O2’s London and AT&T’s New York networks to a standstill. Meanwhile, Nokia is developing a potentially lucrative business called NAVTEQ too. This is a leading provider of digital mapping and related location-based content for cars, mobiles and other users.
As for the numbers, analysts are forecasting 2010 sales and underlying earnings per share (EPS) of €42bn and €0.55 respectively, rising to €45bn and €0.66 cents in 2011. That puts the shares on undemanding price/earnings (p/e) ratios of 14.1 and 11.9. The balance sheet is rock solid with net cash of €4.4bn as at October. That’s enough to maintain the 5.2% dividend yield. I rate the group on a ten times through-cycle earnings before interest, tax and amortisation (EBITA) multiple, assuming sustainable margins of 10%. After adjusting for cash, that delivers an intrinsic worth of about €12.50 a share.
There are a few concerns. These include aggressive competition, technological change, price deflation, currency fluctuations and, of course, the restructuring plan itself. Equally, though, there are billions of people on the planet without fixed-line internet access who have yet to embrace high-speed wireless connectivity. At these depressed levels, Nokia is attractively priced and must be a tempting takeover target. For instance, bonding Dell’s computing expertise with Nokia’s mastery of everything mobile would surely create a winner in this new age of convergence.
Fourth-quarter results are out on Thursday 27 January and AlphaValue has a target price of €10.40 a share.
Recommendation: BUY at €7.80