Late last week, Jeff Kvall of Barclay's Capital cut his rating of Nokia (NOK) from Overweight to Equal Weight and lowered his price target to $4 per share. Similarly, analysts at Zacks downgraded the stock to Underperform, stating their belief that the company will face serious margin pressure in a tough industry that is dominated by rivals Apple (AAPL) and Google (GOOG). They called their view of the recent alliance between Nokia and Microsoft (MSFT) "skeptical" as to the potential for success. The downgrades seem like simply the latest in a series of negatives for a company that has been hit by a shift away from its core business in cheap phones by consumers, a significant software glitch on the tails of its most recent release in the smartphone space, and a generally negative view by investors. To put the case in the simplest of terms: They are all wrong.
If one looks simply at Nokia as he or she would any other company, the analysts may be able to make a case for their positions; it is important to remember that they are paid to have an opinion of a given stock within a specific perspective. If one considers the stock through the lens of these analysts, one sees a company that has partnered with one of the world's declining behemoths, Microsoft, in an attempt to compete with arguably the two most powerful companies on the planet. Nokia is not trying to outflank Apple and Google, it is charging straight at them both on what any reasonable analyst might call a suicide mission. The addition of Microsoft and the change of focus for the company is commendable, and the new management has been referred to as "crisp" by Mr. Kvall. But this is David trying to fight two Goliaths at the same time -- not a good bet unless you are using someone else's money.
The Dead Poets Live
If we can take something away from Robin Williams' Professor Keating in the movie Dead Poet's Society, it is that perspective is everything. Sometimes one needs to stand on his or her desk and, with the strength of a barbaric yawp, proclaim that there is a better way to consider this embattled company. The view from the desk top suggests that rather than looking at it purely as a stock, with a per-share price hovering around $4, the stock is better considered as a never-expiring option and as a micro-customizable fixed-income instrument. These seem like a good starting point because while an option may expire worthless and there is no guarantee that Nokia will not change its dividend if things continue to worsen, under the current set of circumstances, the risk/reward profile looks very attractive.
Let's Talk Turkey
As an income play, Nokia is currently trading with a dividend yield of 4.4%. Ericsson (ERIC) pays a dividend yield of 2.6%, while neither Motorola Mobility Holdings (MMI) nor Research In Motion (RIMM) pay a dividend at all. On the income side of things, neither Apple nor Google pay a dividend either. At a time when U.S. treasuries are barely paying 2% and finding any yield at all is extremely difficult, the income available from Nokia looks very appealing. What this means is that if the stock is only able to maintain its price for the period during which an investor holds it, he or she will get a return that is more than double that available in government securities. There is no doubt that Nokia is a far riskier bet that the U.S. government, despite the best efforts of the Treasury and Federal Reserve to the contrary. But given the importance of Nokia within its local economy, it seems unlikely that the company will disappear anytime soon. If anything, at these levels, the company makes an interesting takeover candidate (more on that below).
Consider It An Option
Anytime a stock dips consistently below the $5 per-share level, there is a tendency for investors to consider the stock less attractive. While this certainly should apply to a small-capitalization stock that may be struggling for its very existence, Nokia is a $14.9 billion market capitalization company. Rather than considering the stock purely as an equity investment, if one considers the roughly $4 per share price as an option premium for an option that will never expire, the play looks more interesting. On a valuation basis, the stock is not particularly attractive. It does not have a price-to-earnings ratio because it had negative earnings, where Ericsson has a P/E of 16.8, Research In Motion has a P/E of 5.8, Apple has a P/E of 17.2, and Google has a P/E of 21. The company is no more attractive on an operating margin basis either. It has an operating margin of 1.8% relative to 10.9% for Ericsson, 10.7% for Research In Motion, 33.9% for Apple, and 32.3% for Google.
Still, the question remains: If Nokia is so marginal as an equity investment, does it really make sense to commit capital? If the company is marginal as an equity, it is somewhat expensive as an option. While being advocated as an option in one sense, the investment is an equity position, which means that one will receive the income discussed above. Furthermore, at these depressed prices, the company may be an attractive takeover candidate. While it might be difficult to conceive of the precise strategic advantage that purchasing the company may represent, it is its weakened position that creates the interest. Overall, there are enough positives about Nokia that it should be considered, even if only in small quantities, as a part of any comprehensive portfolio -- despite the negative view of the analysts.