In a recent Reuters article, John Strand, head of Strand Consult, comments on the departure of Nokia CTO Richard Green: "I think that this ... will confirm to the most sceptical people that Nokia can never make a turnaround." Adds Strand, "The victim here is again the shareholder."
If it's true that stock price bottoms are typically reached when investors and analysts turn despondent, then Strand's comment could signify that the worst for Nokia shareholders may finally be coming to an end. Strand's categoric assertion that Nokia can "never" improve its market position squares neither with the fact that the future is inherently unknowable nor with the fact that Nokia has both the financial and technical resources to bring to market compelling products in the future.
Consider Nokia's financial position for a moment. As of March 31st the company had cash and investments (highlighted in green below) of 11.6 billion euros compared to debt (highlighted in red below) of 4.7 billion euros, implying a net cash balance of 7.0 billion euros or just over $10 billion (at an exchange rate of 1.46 dollars per euro). This net cash balance may diminish as Nokia transitions to the Windows operating system for mobile phones, but it's unclear how much cash may be used during the transition.
Nokia -- Balance Sheet (in millions of euros)
Subtracting $10 billion from Nokia's recent market value of $23 billion implies that we are effectively paying $13 billion for the enterprise. By comparison, the two companies that until recently constituted Motorola -- Motorola Solutions (NYSE:MSI) and Motorola Mobility (NYSE:MMI) -- have a combined enterprise value of $18 billion. Few would argue that Motorola has more valuable assets or a better market position than does Nokia, so something seems to be amiss here.
Perhaps one could argue that the Motorola companies are grossly overvalued, but this seems unlikely considering that value investors Carl Icahn, Dodge & Cox and NWQ owned roughly 9%, 8% and 5%, respectively, of the two Motorola entities at March 31st. If Icahn considered Motorola to be a juicy target for activism, then Nokia should rank highly on his list of prospects as well. Only time will tell whether a major activist starts pushing for change at or a breakup of Nokia, but our analysis suggests that the company's market quotation is all but crying out for such involvement.
Nokia -- Sum-of-the-Parts Valuation Analysis
The preceding table lays out how one might think about the fair value range of Nokia shares. The analysis considers each of the company's three major segments separately, making assumptions and estimates regarding normalized earning potential and fair value multiples. To be sure, those figures are subjective, and readers may tweak the analysis based on their own estimates and assumptions. The above data suggests a fair value range of 10-16 euros, or $14-23 per share. Of course, if Nokia's earnings go to zero and stay there, the company will be worth considerably less than the recent stock price. This is what the bears seem to be arguing, but we have yet to see any convincing analysis that shows Nokia's earning power has been permanently destroyed.
In the current negative hysteria surrounding Nokia, it is easy to forget that the company remains the world's leading provider of mobile devices, with 1.2 billion people using a Nokia handset. The distribution capability underlying such a market presence alone may be worth a large fraction of Nokia's recent market value. Microsoft (NASDAQ:MSFT) and Samsung (OTC:SSNLF) have been rumored as potential acquirers of a piece or all of Nokia, but they are not the only companies that might find Nokia's global footprint a valuable asset. In short, while there is much to be concerned about regarding Nokia's turnaround, the market seems to be ignoring the positive sources of equity value at this leading global handset maker.
Disclosure: I am long NOK.