There have been several rumors over the last couple of days, most recently involving Microsoft, of potential bidders circling Nokia's (NOK) device business. This should serve to focus the market on the value in Nokia, its device business and its 50.1% stake in Nokia Siemens Networks. Nokia Siemens Network received recent press coverage as allegedly Private Equity has been invited to look at the company.
Consider the following as to why Nokia is significantly undervalued.
Nokia Siemens Network is set to generate around $1.1bn of FCF in 2013 on sales of $20bn. Operating margins are forecast at near 9% for 2013, and it has $2bn of net cash. Yet the press is bounding about a valuation of only $9.2bn since the news broke that Siemens NSN stake might be for sale. This sounds too low and is explained by the source of this valuation. A European broker who covers Nokia did a report whereby it valued NSN at only $9.2bn. However do note that this European broker has a sell rating on Nokia.
This valuation also doesn't chime when compared with Ericsson, which has market cap of $40bn, makes about $33bn of revenues and generates an operating margin 'only' 150 basis points higher than that at NSN. As such the $9.2bn figure being seized on could be very wrong. Also consider NSN has about $2bn of net cash on its balance sheet and is generating significant free cash flow. If we assume conservatively an equity value of $12bn, it could be worth $6bn to Nokia if NSN is crystallized.
As such adding up the approximately $4bn of net cash ex NSN on Nokia's Balance Sheet (as reported at the end of 2012) as well as the $6bn of NSN value gets to a value of $10bn. This compares to Nokia's market cap of $13.5bn.
That means for only $3.5bn an investor is getting hold of Nokia's HERE division, its patents as well as Nokia's device business.
The HERE division (mapping) generates about $1bn of revenues per annum at a 75% gross margin as a lot of patent income. Consider Google just bought mapping start up Waze for $1.1bn. Also the division contains Nokia's $8.1bn Navteq acquisition from 2007. I have seen valuations of this division at greater than $3.5bn.
Investors are potentially getting Nokia's Device business for free. This is at a time when Nokia's R&D budget in 2012 was $7.3bn (eclipsing Apple) as it has been restructuring the handset business and giving it new direction. This new direction in the launch of the Lumia smartphone range is only literally starting to come through as new Lumia products are being launched and gaining traction.
Please note on July 11, there is an upcoming Lumia launch in New York City, which is rumored to have a killer app of a 43 megapixel camera, good enough to challenge mid to high end stand alone camera makers. The point is the product coming out of Nokia's smartphone division is starting to gain traction driven by the Windows operating system. Microsoft and Nokia have partnered to compete with Apple and Samsung and have a very credible product for the first time since smartphones took off.
In conclusion potentially for only $3.5bn in excess market cap (over the value of NSN and Nokia's net cash position) an investor is getting the HERE division as well as a Mobile Handset business that was once the Number 1 globally, has spent $7.3bn in 2012 on R&D and is now partnered with Microsoft. The two largest sleeping giants of the tech world (Microsoft and Nokia) are waking up and investors should take serious note.
In terms of positioning there are still a lot of negative backward-looking sell-side analysts as well as a legacy short base in Nokia.