NOK: Nokia Stock Sell-Off Is Overdone, Buy On The Dips

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Depending on the metrics you’re using to evaluate Thursday’s first-quarter earnings results from Nokia Corporation (ADR) (NYSE:NOK) you can be either pleased or utterly disappointed. And you would be right on both counts. But to dump NOK stock solely on one quarterly performance seems misguided, if not entirely stupid.

nokia-nok-stockNokia, headquartered in Finland, posted overall revenue that surged 20% year over year, reaching 3.2 billion euros, up from 2.6 billion euros a year earlier. The problem? Operating profit tumbled 13%, down from 305 million euros a year ago to 265 million in the just-ended quarter.

On the news, NOK stock is getting shellacked Thursday morning, down more than 10% from Wednesday’s close of $7.40. And it make no sense for several reasons.

Understanding the New Nokia

Investors seem miffed that the bulk of the profit decline came from Nokia’s network division, where profits fell 61%, even though revenue climbed 15% year over year. Investors are missing the bigger picture here, though.

Sure, the profit decline in the network segment is disappointing. From my vantage point, however, that’s a welcomed signal that Nokia is now focused on growth, suggesting it has gone beyond “stabilizing the business.” That Nokia is now engaged in merger discussions with Alcatel-Lucent SA (ADR) (NYSE:ALU) is yet another example that Nokia’s business has evolved from the “stabilization” stage.

It was the restructuring aspect of Nokia’s recovery that made NOK stock less attractive. But things have changed, given that NOK has now posted revenue increases in all business segments for the third consecutive quarter. So now that growth appears to be the focus, NOK stock should climb accordingly.

Trading at a P/E of 8, NOK stock was already cheap. Why? Because Nokia was (then) trying to figure out what it wanted to be: a tech company, a network specialist or a pure-play telecom power. The answer is now clear. Nokia is going to be a hybrid of all three, by my estimation.

And the company is becoming more aggressive to ensure that its revenue growth remains a priority.

“Unsatisfactory,” is the word used by NOK CEO Rajeev Suri as he described the networks division’s profits, adding Nokia was hurt by stiffer competition and “strategic entry deals, particularly in China.”

And I don’t suspect Suri will want to use these same descriptions in the quarters ahead. So the best play here is to be patient with NOK stock and buy on the dips.

Expectations are low. How else can you explain NOK stock trading at a multiple of eight? The average tech stock trades at a P/E of more than twice that. Most industry experts, for instance, still argue shares of Apple Inc. (NASDAQ:AAPL) are cheap. And Apple has a P/E above 17.

Of course, I’m not suggesting Nokia should be compared to AAPL or that NOK stock deserves the same level of respect that AAPL stock gets. But purely from a valuation perspective, one has to be blind to all important methods of stock appraisal to sell NOK stock on this quarterly performance.

The bottom line for NOK stock

By all accounts, 2015 was a “throwaway year.” Full-year estimates of 35 cents per share implied a 5.4% year-over-year decline. Next year, earnings are projected to climb 14%, reaching 40 cents per share. Factor in a possible 2-cent beat and Nokia could grow 2016 earnings by 20%. And that’s an important psychological mark, which should earn NOK stock a P/E far richer than eight.

In that vein, as they often say on Wall Street (and in the neighborhood I grew up in), “one person’s trash is another person’s treasure.” And with NOK stock down almost 10% Thursday morning, this may prove to be the quickest 10% gain once analysts begin to apply real logic to the state of Nokia and NOK stock.

At this writing, Richard Saintvilus held shares of AAPL.


Article printed from InvestorPlace Media, https://investorplace.com/2015/04/nok-nokia-stock-sell-off-overdone-buy-dips/.

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