Nokia Corporation (ADR) (NOK) Is Down…But Not Out

Nokia CorporationIt takes a while to turn around a company, but when it happens the returns can be huge. Nokia Corporation (ADR) (NYSE:NOK) has stopped the bleeding of cash, but has yet to return to stable profitability. When it does, the stock could take off.

Competition problems

Management routinely cited competition as a major headwind for Lumia sales, as new phones from Google Inc (NASDAQ:GOOG) to Research In Motion Ltd (NASDAQ:BBRY) take to the shelves. BlackBerry is in a similar position as Nokia Corporation (ADR) (NYSE:NOK), and is hoping that its Z10 and Q10 phones turn the company around. The Z10 sold 1 million phones before BlackBerry announced earnings, and according to Jefferies sales are holding up steadily.

Nokia Corporation (ADR) (NYSE:NOK) is already competing with the Z10, and the Q10 is just around the corner. The Q10 is the phone to really watch from BlackBerry, as it has a keyboard which is appealing to older demographics.

In the UK, the Q10 is apparently flying off the shelves with some stores being completely sold out. I think BlackBerry shares are overvalued, but you can’t undervalue the new competition and the threat it poses to other smartphone makers.

Lumia hopes

Where Nokia Corporation (ADR) (NYSE:NOK) is seeing growth is in its Lumia line. Some 5.6 million Lumia’s were sold this quarter, up 27% from the 4.4 million sold last quarter. This is where the bullish part of Nokia’s earning’s report comes in.

Management said:  “supported by the wider availability of recently announced Lumia products and the easing of supply constraints, we expect sequential volume growth in Q2 to be even higher than the 27% sequential growth we saw in Q1″.

This means that management sees more than 27% quarter-over-quarter growth in Q2 2013. At just 27% growth, more than 7.1 million Lumia’s would be sold. This growth could lead to 30+ million Lumia’s being sold in 2013.

In this quarter, only 500,000 Symbian devices were sold (down from 2.2 million devices last quarter), and roughly two thirds of all phones sold were from Windows 8. The smart device division’s gross margin was up 2.7% to 20.7%, as more high-end Lumia’s were sold.

Looking forward, Nokia Corporation (ADR) (NYSE:NOK) plans on offering the Lumia 928 at Verizon Communications Inc. (NYSE:VZ) next month (according to Bloomberg). So far, AT&T Inc. (NYSE:T) has the monopoly on the high-end Lumia’s in the US, but in the last quarter US shipments fell from 700,000 to 400,000 quarter-over-quarter.

This could get Nokia to sell more than 1 million Lumia’s in the US in one quarter by year’s end. This will boost sales and margins, as the major US telecoms try to find more competition to compete with the iPhone and Android to give themselves more leverage in subsidy deals.

On May 14, Nokia Corporation (ADR) (NYSE:NOK) plans on unveiling a new Lumia handset in London. This could be the “phablet” that the Financial Times reported Nokia was working on, or it could be another high-end smartphone. I don’t think it will be a lower-end Lumia, as the company just released two of those in February (the 520 and 720).

NSN

NSN is a 50-50 joint venture between Nokia and Siemens AG (NYSE:SI), and makes telecom infrastructure. Recently NSN has been taking market share in the 4G LTE market and is using the higher-margin business to post an operating profit.

NSN’s operating margin is going to be around 5% this year, give or take 4% either way. Due to divestitures and positive margins, NSN has been adding a few hundred million dollars to Nokia’s balance sheet over the past few quarters.

This is a significant improvement from the capital drain it used to be. Siemens has expressed interest in selling its venture, and Nokia Corporation (ADR) (NYSE:NOK) with its $5.9 billion net-cash position could buy up part of that stake. It is pure speculation at this point, but that is an important catalyst going forward. NSN could be worth anywhere from $6 billion to $12 billion, so it is important to see how it values that investment if it does sell it.

Siemens would benefit from a sale of NSN, as its current operating margin is 9% and the company is shedding non-core assets to bring up margins. While NSN has turned itself around nicely, its expected operating margin is around 5%, which falls short of what Siemens is looking for. Siemen’s CEO stated that he wants to cut costs by approximately $7.7 billion over the next two years, and this is one way to do it.

A sale would help Siemens cut costs, improve profitability, pay down its debt and boost its dividend. NSN is a small part of Siemens (with a $88 billion market cap) and it isn’t unreasonable to assume it could easily sell it off within the next few quarters.

Final thoughts and the sum-of-parts theory

I’m still long on Nokia Corporation (ADR) (NYSE:NOK), because I feel like the value of the sum of its parts aren’t fully recognized at a $12 billion market cap.

If we value Nokia’s NSN stake at $3.5 billion (on the low end of the estimates) and add in Nokia’s $5.9 billion net-cash position, then we get $9.4 billion. This leaves the value of its handset business, the Lumia line, its locational services business, and its 10,000 patents, at just under $3 billion.

I think that’s dramatically underestimating Nokia’s potential. Nokia recently won two patent cases against HTC and makes about $500 million a year in patent licensing. That amount is going to increase over the years as Nokia lawyers up and files lawsuits all over the world.

Nokia’s Lumia business is going to grow at around 30% this quarter, and the company has a reasonable chance to sell 30 million Lumia products in 2013. Nokia’s locational-services business is operating in an industry that is expected to grow to $10.8 billion in 2015, up from $2.8 billion in 2010.

I think Nokia’s ability to cut costs and pursue multiple areas of growth will enable its stock to hit $5 by the end of the year. I’m bullish on Nokia, but more so in the long term. There are plenty of short-term hiccups that could easily happen in 2013.

The article Nokia: Down but Not Out originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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