Nokia – Is There a Chance?

By Chad Henage - January 27, 2012 | Tickers: MSFT, NOK | 0 Comments

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Nokia (NYSE: NOK) is a company at a crossroads and it knows it. It's all in with its bet on the Windows Phone operating system. The two most recent Windows Phone devices look on par with other smartphones on the market today. The question is, with all the negativity surrounding the company's inability to make headway in the smartphone arena, is there still a chance?

Nokia is more than a handset maker. The company defines itself as having three major divisions: Devices & Services, Nokia Siemens Networks, and Location & Commerce. I think the most recent fourth quarter earnings release gives us some highlights of Nokia's current position.

Devices & Services:

• Net sales 6.0 billion Euro down 29% year-over-year (59.4% of total sales)

Nokia Siemens Networks:

• Net sales 3.8 billion Euro down 4% year-over-year (37.62% of total sales)

Location & Commerce

• Net sales 306 million Euro up 15% year-over-year (2.98% of total sales)

Without a turnaround in handset sales Nokia isn't going anywhere fast. From CEO Stephen Elop's comments, the company has sold over 1 million Lumia devices (the company's flagship Windows Phone). He also points out that Nokia expects to bring the Lumia devices to the huge markets of China and Latin America in the first half of 2012.

An interesting financial note is Nokia's net cash position changed from nearly 7 billion Euro to just over 5.5 billion Euro in the last year. With this type of burn rate Nokia could in theory last another 3 and 2/3 years on their existing cash pile. On another positive note, Nokia says they expect that platform support payments and software royalty commitments from Microsoft are expected to be in the billions of US dollars over the life of the agreement.

So how does this all come down to the bottom line? Here is what Nokia looks like if you assume they will meet analysts targets this year:

Current Price: $5.09
P/E based on '12 earnings: 14.97
Growth Expected: 7.25%
Trailing Dividend Yield: 9.43% 

Clearly the number that should intrigue investors is the trailing dividend yield. Nokia has not mentioned cutting the dividend, and based on a net cash position it seems unlikely the dividend would be changed anytime in the near future. The bottom line for Nokia is how well will Windows Phone devices sell?

The fact that the ecosystem is supported by Microsoft (NASDAQ: MSFT) and its more than $50 billion in cash and investments argues for a lot of Windows Phone commercials. With Microsoft readying Windows 8 to work across PCs, tablets, and phones, there could be a quicker pace of sales because of familiarity. I believe many customers who are familiar with their Windows PC at home would be more likely to try out a Windows Phone because the experience should be similar.

Even with as powerful as iOS and Android are in today's market, you get a different experience on any of these devices than you do on most PCs. There isn't much of a learning curve, but it is still different than a PC experience. If Microsoft can make the Windows 8 experience seamless across devices this changes the game. Combine this potential boost to Windows sales and Nokia's unmatched distribution network and it's possible Windows Phone becomes the third mobile operating system of choice. In order for Nokia to be a good investment they don't have to become number 1, number 3 would do just fine.

Nokia's net cash gives them time to ramp up production of newer Lumia devices and time for Windows 8 to start to move market share. If Nokia can cut down and ultimately reverse its cash burn, maintain its dividend, and produce further attractively priced models they can be a competitor. Given the massive movement from regular and feature phones to smartphones, Nokia has many chances to up-sell their existing customer base. They need Microsoft to advertise the heck out of the Windows Phone platform and get Windows 8 out as soon as possible. Nokia also needs to advertise their devices to remind customers that they are still relevant.

Collecting an over 9% dividend while waiting for a turnaround sounds pretty good to me. Consider this a starting point for your research and decide if number 3 is good enough to earn this company a spot in your portfolio.

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