I’ve never been much of a fan of Nokia (NYSE:NOK) stock. Nokia has traded sideways since late 2013 and seemingly with good reason. It has some good attributes, a solid balance sheet, and a 4% dividend, but it’s long been difficult to make a compelling case for buying Nokia stock..
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Indeed, eighteen months ago, after NOK rallied, I advised caution. Since then, including dividends, Nokia has been about flat. And I don’t see the case here as all that different. Over the next few years, 5G will provide a driver, the balance sheet still is strong, and the troubles of China’s Huawei will position Nokia to take market share.
But the cost savings from the merger with Alcatel-Lucent have been harvested, and the 2020 EPS guidance doesn’t make NOK stock look all that cheap. The networking business continues to be a difficult one and seemingly offers cheap and more intriguing plays. There still seems to be a decent chance that the next few years for NOK look much like the last few.
NOK Stock After Earnings
The Q4 earnings report from Nokia truly sums up “the eye of the beholder” nature of Nokia stock. Investors looking for good news can look to Q4 numbers and initial guidance for 2019 and 2020. Revenue in the quarter rose 3% year-over-year, while adjusted operating income grew a solid 12%. The software business (a key part of Nokia’s long-term growth strategy) posted a 12% constant-currency increase in sales for the quarter.
Meanwhile, the outlook seems rather strong. Nokia generated EPS of 0.23 euros in 2018 but expects that figure to grow sharply over the next two years. Initial 2019 guidance is pegged at EUR 0.25-0.29, followed by a sharp gain to EUR 0.37-0.42 in 2020.
At the midpoint of the latter range, EPS should grow 72% over the next two years. That seems to show that the shift to 5G, which should start hitting Nokia results in the second half of next year, is a real driver for Nokia earnings.
Taking a broader fundamental view, however, the results look far less impressive. Q4 numbers were good but full-year 2018 results were disappointing. Sales rose just 1% excluding foreign exchange effects; revenue growth in Software was just 4% at constant currency. Consolidated adjusted operating income declined 16%, with margins dropping 140 bps.
Adjusted EPS is growing the next two years but it fell 30% in 2018 and 2019 guidance is below 2017 levels, and even the high end of the 2020 range only suggests a little over 8% annual growth over the three years.
In the context of the 5G shift, Huawei’s issues, and the supposed importance of software as a growth catalyst, that performance isn’t all that impressive. And even with Nokia stock at $6, it hardly seems impressive enough.
The Valuation of Nokia Stock
NOK might seem cheap but its valuation is hardly an outlier in the networking space. At the high end of 2020 guidance, and backing out the company’s net cash, NOK is valued at a little under 13x earnings per share.
That’s not a bad multiple, certainly. A dividend yield (based on the 2019 payout of EUR 0.20) of 3.75% helps the case as well. But paying 12x+ out-year earnings in a bullish scenario is a good, but hardly spectacular, deal.
Meanwhile, in the same sector, there are even cheaper plays. Networking leader Cisco Systems (NASDAQ:CSCO) is available for a similar multiple. Juniper Networks (NYSE:JNPR) can be owned for even less. Neither company necessarily is posting torrid growth, but again, at the midpoint of guidance and looking at the multi-year trajectory, Nokia’s own growth is rather muted.
Certainly 5G is going to help revenue and earnings but even with that growth NOK looks fairly valued. And as far as 5G plays go, NOK stock hardly seems like the best, or cheapest one.
Qualcomm (NASDAQ:QCOM) has issues with Apple (NASDAQ:AAPL), and I’ve long been a skeptic toward that stock, but back at the lows it looks intriguing. QCOM’s dividend yield is higher (almost 5%) and its valuation lower, at less than 12x 2019 earnings.
Even a provider like Verizon Communications (NYSE:VZ) or, for more adventurous investors, China Mobile (NYSE:CHL), should see benefits from 5G. VZ, in particular, looks like an attractive dividend play, as I wrote last month.
The long-running problem for Nokia persists: it’s simply difficult to get that excited about the stock. The dividend yield is nice (though there are added complications for US-based investors), but there are other income stocks out there. Growth has been muted, and other similar networking plays seem to be available for cheaper.
It’s tough to see what makes NOK the best play, and what gets Nokia stock out of its range. That’s been the problem for years, and it still is.
As of this writing, Vince Martin has no positions in any securities mentioned.
