Nokia Corporation (NOK) is a communications equipment company that makes a variety of mobile devices for consumers. In addition, the company offers Internet services including applications and networking services for businesses and government agencies. Although the company is best known for its mobile phone handsets, its other business units should be considered when making an investment decision.
Nokia boasts a glorious past having once been a veritable 800 pound gorilla in the mobile handset space. As investors everywhere are well aware, the company missed the boat with the emergence of smartphones and is now in the midst of a major effort to restore its former glory. Some investors might be surprised to learn Nokia still holds second place behind Samsung (SSNLF.PK) in total market share for all mobile handsets, the smart kind and the not so smart kind. Again most investors are well aware the "stupidphone" market is not very profitable. However, did you know Nokia has two other operating divisions in addition to its handset devices business?
The first is a wholly owned subsidiary in the GPS mapping applications and services space, NAVTEQ. In Q3 2012 Nokia announced the rebranding of NAVTEQ products as the HERE line. NAVTEQ already has a commanding 85% market share in automotive navigation systems and the HERE line will expand mapping capability across all mobile device operating systems, including iOS and Android.
The second is a 50/50 joint venture with diversified industrial giant Siemens (SI), called the Nokia Siemens Network (NSN). The company is one of the largest providers of telecom equipment for mobile broadband networks in the world. It is now the third largest provider in the US market and aggressively eyeing the number two spot.
On April 18th Nokia announced quarterly results and investors did not like what they heard, driving down the stock price 11%. A bright spot that was overlooked was the operating profit posted by NSN. The Wall Street Journal reported that NSN's quarterly profit outperformed network equipment rival Ericcson Telephone (ERIC).
What does the Future Hold?
Nokia was once a major player in the mobile handset market but failed to react to the threat of the smartphone revolution. The company is in the midst of a major turnaround effort. Some believe the revenue from NAVTEQ can help keep the company solvent until Nokia's line of Lumia smartphones experiences market share growth.
The company has worked hard to control costs and is now a player in the smartphone space through its partnership with Microsoft (MSFT). The Lumia series of Windows based smartphones has been well received, and now controls about 80% of the Windows based smartphone market. However, Android and Apple phones combined account for about 85% of the total smartphone market, with Nokia getting 80% of the current Windows OS total market share of only 4.1%. The future of Nokia is primarily all about the future of Windows based smartphones. An encouraging sign is the Q1 growth to 4.1% share as of February 2013 compared to 2.7% for the year ago corresponding period.
Analysis of Nokia's prospects focuses heavily on the potential sales growth of the company's smartphone, the Lumia line, and its "stupidphones", the Asha line. Although current revenues from NAVTEQ make a minimal contribution, there is little being written about the growth potential of the new HERE line.
NSN accounted for 46% of Nokia's total sales for FY 2012, yet this operating unit is also drawing little attention from investors and analysts alike. While the market is justifiably focused on the fate of Nokia's core business, it certainly seems the potential of both NSN and HERE should be taken into account.
Nokia vs. Competitors
While Nokia competes directly against Apple (AAPL) and BlackBerry (BBRY) for handsets, the technology communications equipment sector provides some other interesting competitors. Motorola Solutions (MSI) makes public safety radio handsets as well as infrastructure and software services. This company emerged from the breakup of the Motorola Corporation, with the mobile device unit, Motorola Mobility going to Google (GOOG). Ericcson Telephone is an industry leader in mobile networking equipment and services and directly competes with the Nokia Siemens Network.
There are many ways to estimate the fair stock value of a company. For this purpose, we applied the discounted-earnings-plus-equity model developed by EFS Investment analysts to these three competitors. The following table compares some key performance metrics for the three companies:
Trailing Twelve Month P/E
EPS Growth (3 Year Avg)
Return on Equity
|Stock Valuation||N/A||Overvalued||Fairly Valued|
Data taken from Morningstar and Financial Visualizations on May 10, 2013.
The calculations based on this model allow us to suggest the following: currently, MSI stock is overvalued, whereas ERIC is fairly valued. EFS's fair stock price valuation indicates that KMP is trading at 4% premium over fair value.
The Price to Earnings ratios for Motorola and Ericcson seem high until you check the sector P/E, which is 70.9. From the table, it appears Ericcson was not able to turn solid EPS growth into a higher return on equity for its shareholders. Nokia has the edge in dividend yield, but the company recently suspended its dividend in light of disappointing sales.
Make or Break for Investors?
Nokia shares were on an upward roll as investors apparently began to believe in the turnaround story but the disappointing earnings results in January sent the stock price back down to earth, with a year to date loss of close to 11%. Considering the value of its NAVTEQ subsidiary and the Nokia Siemens Network, further declines in the stock price could be a buying opportunity for investors with high risk tolerance. For the rest, wait and see and keep your eye on the release of the next generation of Lumia phones.
If you think Nokia is worth a look, focus your analytic eye beyond market acceptance of Lumia smartphones. HERE products are in their infancy and the NSN future especially bears watching. The joint venture agreement allows either party to withdraw without the approval of the other. Siemens is reportedly interested in getting out, leaving Nokia with three options, according to investment bank Morgan Stanley.
The first thing for Nokia is to look for a funding partner to allow a buyout of Siemen's interests. The second is to find another JV partner, with Alcatel-Lucent (ALU) rumored to be a possibility. The third is to take NSN public with an IPO. Morgan Stanly estimates that NSN accounts for approximately $1 of Nokia's share price while Deutsche Bank assigns a $2 billion valuation to the NAVTEQ operation. WSJ claims "many analysts don't assign much value to Nokia's core mobile-device business."