Nokia Sum-Of-Parts: Not Cheap Enough

Sep.26.12 | About: Nokia Corporation (NOK)

Nokia (NYSE:NOK) is a battered stock that trades at very low valuations. BMO analyst Tim Long thinks the company has no value beyond its cash and patent portfolio. Based on this sentiment, a rough sum-of-parts estimate for Nokia was created. Nokia shares are trading well below their intrinsic value.

Patent Portfolios

Nokia's patents are estimated to be worth $7.5 billion.

Brand Value

In 2012, Nokia's brand value fell off Millward Brown's 2012 BrandZ Top 100 Brands List. To be conservative, we can ignore its value.

Book Value of Equity

Any book values associated with goodwill or intangible assets can be stripped out of the balance sheet so that their economic estimates can be added back in later:

Nokia Balance Sheet (IFRS € millions)

12.31.2011

6.30.2012

Adj 12.31.2011

Adj 6.30.2012

Capitalized development costs

6

1

0

0

Goodwill

4838

4989

0

0

Other intangible assets

1406

994

0

0

Property, plant and equipment

1842

1683

1842

1683

Investments in associated companies

67

60

0

0

Available-for-sale investments

641

691

641

691

Deferred tax assets

1848

1378

1848

1378

Long-term loans receivable

99

82

99

82

Other non-current assets

3

3

3

3

Non-current assets

10750

9881

4433

3837

Inventories

2330

2126

2330

2126

Accounts receivable

7181

5963

7181

5963

Prepaid expenses and accrued income

4488

3576

4488

3576

Current portion of long-term loans receivable

54

29

54

29

Other financial assets

500

320

500

320

Investments at fair value

433

499

433

499

Available-for-sale investments, liquid assets

1233

233

1233

233

Available-for-sale investments, cash equivalents

7279

6785

7279

6785

Bank and cash

1957

1901

1957

1901

Current assets

25455

21432

25455

21432

Total assets

36205

31313

29888

25269

Total Liabilities

22289

20993

22289

20993

Total equity

13916

10320

7599

4276

Non-controlling interests

2043

1311

2043

1311

Equity Attributable NOK Shareholders

11873

9009

5556

2965

Click to enlarge

As of the second half of 2012, the adjusted value of Nokia's net assets attributable to common shareholders was € 2.97 billion. (Note that some of the equity value belongs to minority interests and must be left out when trying to value NOK shares.)

Sum of Parts

Adding adjusted net asset value in dollars (as of this analysis, the Euro was trading at about $1.28), estimates for the intellectual property portfolio, and brand value provide a total that is slightly more valuable than the current market capitalization of NOK common shares:

Parts

Estimated Value ($USD Billions)

NOK Shares Adjusted Net Asset Value

$3.8

Patent Value

$7.5

Sum-of-Parts

$11.3

Market Capitalization

$10.0

Discount to Sum-of-Parts

11.5%

Click to enlarge

This analysis is reasonable, but might be aggressive. Though we left out brand value, the liquidation value of assets might be much lower than their book values. What if liquidation losses overshadow any brand premium Nokia could fetch in liquidation?

The solution to this problem (and so many others) is money. If NOK shares fall further, we can stop wondering about whether the 11.5% discount estimate is a little too high or a little too low. The crudeness of this analysis can easily be outweighed by significantly lower prices.

Many value investors consider a 30% discount to be an acceptable margin of safety before investing. This is an arbitrary value which they tend to require for investments with stable going concerns. Nokia is under threat and should require a deeper discount before it can be unequivocally be labeled a sum-of-parts value play.

Rather than assign arbitrary values for you, here are NOK share prices and sum-of-parts discounts associated with them:

NOK Price

Market Cap

SOP Discount

$ 2.13

$7.0

30%

$ 1.83

$6.0

40%

$ 1.52

$5.0

50%

$ 1.22

$4.0

60%

$ 0.91

$3.0

70%

$ 0.61

$2.0

80%

Click to enlarge

Conclusion

I recently published an estimate that shows how like Research In Motion (RIMM) is a sum-of-parts value play. It trades at a deep (like 70%) discount to its tangible and intangible value. At current prices, the same cannot be said for NOK shares. In fact, NOK shares would have to drop below a dollar before they become as attractive on a sum-of-parts valuation basis.

Even if NOK shares do drop in price and its sum-of-parts discount grows, do not make this a sizeable position in your portfolio. Please, please, please do not bet the farm on anything, especially not a firm that is currently in decline. Instead, as a value investment, consider allocating a small portion if the price is right.

Disclosure: I am long RIMM. Specifically, I own long-dated RIMM call options. 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.

Disclaimer: This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing. Moreover, this research does NOT constitute a guarantee.