By Fani Kelesidou
There is much talk around Nokia (NOK) these days. The company's diminishing market share and declining profit figures are making investors anxious. Before deciding whether to give up on Nokia or not, we should not forget Nokia's monumental history. History has its ups and downs. We all know that Nokia is trading at exceptionally low levels, but we should take a minute before declaring it a lost empire.
Nokia has been around for quite some time. In fact, it was first founded in 1865 in Southwestern Finland. It started by making paper and by 1898 it moved on to rubber business. In 1963, the company dived into the telecommunications industry by developing radio telephones for the army. By 1987, it had become an accomplished computer brand and the third largest TV manufacturer in Finland. In 1991, Harri Holkeri, Finland's Prime Minister, made the world's first GSM call, using Nokia equipment. In 1992, Nokia launched its first digital handheld GSM phone. By 1998, it became the world leader of mobile phone manufacturers. After a decade of staying at the forefront of the telecommunications industry, Nokia embraced new technologies and new possibilities. In 2011, the company joined forces with Microsoft (MSFT) and attempted to strengthen its place in the smartphone market. Nokia has come a long way. It started from being a paper manufacturer and continued to be every household's most common brand name. Today, it still remains a telecommunications giant even though it lost the competition against other smartphone manufacturers.
A Lost Empire?
Q2 2012 financial results were mixed. Overall, the company reported a loss of €1.41 billion. Sales were down to €7.54 billion, which translates into a 19% decrease from the same period last year. On the other hand, Nokia reported a strong cash position. The net cash position of €4.2 billion was lower on a quarter-by-quarter basis, mainly because of dividend payments. However, it still exceeded market expectations. Net cash from operating activities was positive and amounted approximately €102 million. Total net cash and other liquid assets were up by 8% on the year-on-year basis.
Currently, the company is experiencing a transition period, and every transition comes with restructuring costs. The company's new strategy concerning the smartphone business has a negative effect on the income statement. For the second quarter of 2012, the non-IFRS operating margin in the Devices and Services segment was negative 9.1%. This negative performance was mainly attributed to inventory-related allowances. In the same period, the non-IFRS results do not include about €500 million in restructuring charges. The third quarter is going to be a challenging quarter. However, I expect the last quarter of this year to be the start of a new era for Nokia with promising profits ahead. The sales of Lumia smartphones and low cost Symbian phones are going to be a varying factor. In the last quarter, Nokia already doubled its sales of Lumia smartphones and sold about four million of them. Sales are going to further increase as new Windows Phone 8 devices are soon to be released.
Strategic Partnerships and New Features Are Going to Boost Earnings
Nokia recently announced a series of strategic partnerships with Virgin Atlantic and U.S. coffee chain, The Coffee Bean & Tea. Nokia will provide wireless charging services to the above companies' customers, a feature that is available on Lumia 820 and 920. Also, Nokia has announced its partnership with Harman (HAR), a global leading supplier of audio and entertainment systems. The two companies will jointly develop a line of wireless audio technology products exclusively designed for Lumia smartphones. Furthermore, in an effort to expand its mapping services Nokia has sealed deals with companies such as, Groupon (GRPN), Amazon (AMZN), Yahoo (YHOO), and Oracle (ORCL). These are just some examples of strategic partnerships, which are going to enhance the company's backlog in the near future. In addition, Nokia keeps adjusting its products to the consumer demands by promoting innovative features. On Sept. 4, 2012, the company announced the launch of its Nokia Music service. This service allows U.S. Lumia costumers to stream music for free from a range of over 150 playlists. Furthermore, at the end of 2012, Nokia is expected to start the shipping of Nokia Asha 308 and 309. These latest additions to the Nokia Asha smartphone series provide customers with new and enriched web services. Nokia anticipates competitive advantage to arise from these low cost smartphones.
I believe that the markets have overreacted on the company's financial results. Currently, NOK is trading at about $2.6. At this price, the stock is deeply undervalued. Its price-to-sales ratio is 0.21 and its price-to-book value ratio is 0.72. Analysts' target price for Nokia is $5.60, suggesting an over 50% upside potential. Also, Nokia stocks are an intriguing investment for dividend-oriented portfolio seekers. The stock yields 6.90%, while the industry's average dividend yield is 1.90%. Nokia's five-year average dividend yield stands at 4.90%.
I believe that, after surviving its transition and restructuring strategy, Nokia will reemerge as a leader in the telecommunications industry. The current cash position is an indicator of how long the company can continue financing its strategy. Even though, the second-quarter results were a bit disappointing, still they were not as bad as most analysts expected.
A surprising element in the earnings report was the fact that sales almost doubled in North America reaching the amount of €128 million. Overall, I expect that in last quarter of 2012, Nokia will manage to return the Devices and Services division to profit. When it does, then faithful investors will be sufficiently rewarded.