5 Reasons Nokia Has More Upside

| About: Nokia Corporation (NOK)

The smartphone refresh by Blackberry (NASDAQ:BBRY) took away some positive momentum in shares of Nokia (NYSE:NOK). Nokia peaked at $4.70, well above the $2.56 closing price when the company was last reviewed. With Nokia shares trading recently at around $4, it is not unreasonable to expect Nokia to regain its footing again.

(Chart Source: Yahoo Finance)

There are 5 reasons investors should consider accumulating Nokia after the recent pull-back.

1) Improving Balance Sheet

Nokia finished 2012 with net cash of EUR $4.4 billion (US $5.9B) and gross cash of EUR $9.9 billion (US $13.3B). More importantly, cash rose EUR $800 million in Nokia's fourth quarter. The improving cash flow gives Nokia more leeway in broadening and promoting its line-up of devices. This would improve profitability in the sale of its Asha phone and Lumia devices.

Last quarter, Nokia increased gross margins by 50 basis points to 22.2%. Most of the gains were helped by a decline in component costs.

2) Higher Unit Shipments

Last year, Nokia launched over a dozen Asha devices and shipped 9.3 million units in the fourth quarter. From the Lumia-based devices (510, 710, 800 and 900), 4.4 million units were shipped in the quarter. In total, Nokia shipped 80 million mobile phones.

3) Sale of Nokia Siemens Could Unlock Value

Stability in NSN (Nokia Siemens Network), marked by 3 straight quarters of profitability, could fetch over EUR $10B (US $13.4B) for the two companies. With Nokia's 50% ownership, a sale of this size would represent nearly half of Nokia's current $15.7B market capitalization. Nokia is no longer in any hurry to sell the unit at a discount. In Q4, nearly all of the working capital (EUR 430 million) was generated by NSN, although this was generated mostly from reducing inventories and receivables.

4) Effective Responses to Competition from Android

Nokia is well-positioned to compete with inexpensive sub-$100 Android devices. The Asha product line includes full-touch models that are functional enough for consumers to prefer over Android phones. In the low-end market, things like better battery life. In the UK, Nokia said it is releasing a Windows 7.8-based device for £149.99. In the U.S., a Lumia 620 was reportedly US $289.99 and was the top-selling device at Expansys.

5) Lumia Devices Could be Updated this Year

Nokia might be releasing a Lumia device with a 41MP image sensor. By the time a Google (NASDAQ:GOOG) Nexus 5 or a Samsung Galaxy S IV is released, Nokia is ensuring that its premium Lumia phone will be on par or better than the competition.

Downside Risks and Conclusions

Nokia suspended its dividend, which could explain the sell-off after the earnings report. This may have driven out income investors. In 2012, Nokia paid out around EUR 750 million in dividends. To enhance shareholder value, Nokia could use the savings to announce a share buyback, or continue to accumulate cash. Either action would be good for shareholders.

There remains more upside for Nokia for shareholders with a longer term time horizon. Lumia sales were held back by the limited launch of the device in places like the United Kingdom. When the Lumia was launched, only a few of the largest retailers and a telecom partner made the device available. As the Lumia becomes more widely available, quarterly earnings should improve.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NOK, BBRY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.