This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines are all telecom, all the time, as analysts are lining up to up their opinions of Verizon Communications Inc. (NYSE:VZ) and Apple Inc. (NASDAQ:AAPL), among others.
Declaring victory on Nokia, and going home
Monday’s announcement that Microsoft Corporation (NASDAQ:MSFT) will buy Nokia Corporation (ADR) (NYSE:NOK) sent Microsoft shares tumbling, as investors worried that Microsoft will be unable to parlay Nokia’s Lumia line into a bona fide rival to the iPhone and Android empires. On the other hand, Nokia shares veritably flew off the shelves (in any event, they were selling better than its Lumias), gaining 31% on the day, and rising a further 2% today.
But not so fast, says one analyst. Now that Nokia Corporation (ADR) (NYSE:NOK) is transferring its cell phone business to Mr. Softy, Nokia’s also giving up the potential to turn around that business, and profit from the turnaround. Plus, a 30%-plus, two-day profit from the shares is not something to be ignored. Consequently, Argus Research is telling investors today that Nokia — which it had recently recommended buying — is now no longer the buy that it once was.
Is Argus right? Well, let’s see here. With $7 billion, $12.6 billion in cash already, and $7.2 billion soon to arrive from Microsoft Corporation (NASDAQ:MSFT), Nokia Corporation (ADR) (NYSE:NOK) post-sale will have about $12.8 billion in the bank. Subtract that from the company’s $19.4 billion market cap, and you’re left with an enterprise value of $6.6 billion for Nokia.
Now what do you get for that? Without its cell phone division to drag it down anymore, rump-Nokia Corporation (ADR) (NYSE:NOK) will consist primarily of Nokia HERE and Nokia Siemens Networks. NSN is a profitable division, earning operating profit before tax of $579 million over the past 12 months. HERE, on the other hand, recorded pre-tax operating losses of $386 million over the past year. Subtract the latter from the former, and what you’re left with is a rump-Nokia earning about $193 million annually — before taxes.
So the question here, really, is whether you think that post-sale, Nokia Corporation (ADR) (NYSE:NOK) is worth paying 34-times pre-tax earnings for, without the potential for supersized growth from a cell phone division turnaround. Personally, I doubt that it is — and I think Argus is right to downgrade.
Apple gets a rare endorsement
So if we’re not to buy Nokia, then who should we buy? An analyst at Cantor Fitzgerald believes that a better place to put your cell phone-investing dollars today is Apple Inc. (NASDAQ:AAPL). On StreetInsider.com, Cantor is quoted pointing out that “Apple’s stock has been challenged this year and down 8% YTD vs. a 15% increase for the S&P 500 Index; however, we believe the stock is in the midst of a recovery. In our view, Apple is on the verge of an extended product cycle that we believe will include a refresh of existing products, increased penetration within existing device categories and entirely new market opportunities,” potentially including an “iTV” or “iWatch.” Between the depressed share price and the sizable growth opportunities, Cantor now says it sees Apple shares hitting $777 apiece within a year.
Nor is Canaccord the only analyst voicing optimistic predictions for Apple Inc. (NASDAQ:AAPL). Wall Street analysts on average see Apple growing its profits in excess of 18% annually over the next five years — a rate that pretty much assumes the introduction of new, yet-undreamed of, products to sustain it.