Nokia Stock Will Gain If New Management Boosts Its 5G Technology Agenda

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Nokia (NYSE:NOK) will have a new CEO and CFO starting on Sept. 1. Topping the new management team’s agenda will be to spur the telecommunications company’s 5G technology sales and profits. If they can do that, Nokia stock should follow.

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Source: RistoH / Shutterstock.com

Nokia, based in Finland, chose outsiders for the two positions. The new CEO, Pekka Lundmark, is presently the CEO of another Finnish firm, the energy company Fortum (OTCMKTS:FOJCY, OTCMKTS:FOJCF). Fortum has a $17 billion market value. So, he’s traded up to a company with a $25 billion market cap.

What Analysts Say About That 5G Technology

At least one analyst, Chetan Woodun on Seeking Alpha, believes the new management team will attempt to drive the company’s non-network related revenues and profits. But, as he pointed out, networks still comprise over 75% of the company’s revenues. So Nokia’s new team will need to strengthen its efforts to win 5G contracts around the world.

In addition, the team will need to help integrate and “digest” the $16.6 billion acquisition of Alcatel-Lucent, which Nokia acquired in late 2015.

In addition, The Wall Street Journal pointed out that China-based Huawei Technologies has taken sales away from Nokia. Huawei uses subsidies from the Chinese government to undercut industry prices, according to WSJ. Moreover, Nokia was behind the curve with its 5G technology up until recently.

Woodun, the Seeking Alpha contributor, wrote that Nokia’s new “Reefshark” system-on-a-chip will come online soon. Nokia’s ground stations will be upgraded with this chip by 2021. However, he argued that the financial impact of this new chip will take several years before it is meaningful.

Meanwhile, the U.S. government has been trying to limit Huawei’s ability to win contracts in the West. They have imposed restrictions on U.S. telecom companies. Washington wants other governments to stop purchasing from Huawei.

The Trump administration has been boosting a campaign to influence companies to try to buy Nokia and/or Ericsson (NASDAQ:ERIC), apparently to no avail. Nokia is considered a low margin businesses.

Nokia’s Financial Outlook Is Looking Better

Last year, Nokia made just $7.9 million on $26.2 billion in sales. That’s almost no margin at all. But, normalized earnings were 8 cents per share, or $448.5 million. That is a slightly higher margin of 1.7%.

However, this year, analysts expect Nokia to rebound. It should make 24 cents per share or $1.346 billion on $25.4 billion in sales. So, despite lower sales, profitability will rise. The margin rate will also be higher at 5.3%.

Moreover, in 2021, analysts expect Nokia to make 30 cents per share or $1.683 billion on $26.6 billion in sales.

This has several implications. First, the margin will rise to 6.3%. So, its margins are not as bad as in 2019. This is still a fairly low number.

Second, Nokia stock is now trading for just 14.8 times earnings. For example, at $4.44 on July 2, the multiple over expected 2021 EPS of 30 cents per share is 14.8x. In other words, Nokia stock is not that expensive.

Lastly, Nokia’s business will be growing nicely. Sales for 2021 will be $1.2 billion higher, or 4.7% if Nokia performs. And earnings per share will be 6 cents higher at 30 cents per share. This implies an increase of 25%.

What to do With Nokia Stock

The U.S. Government’s push to have a U.S. company buy a Finnish company (albeit with many U.S. Lucent operations) is very interesting. This kind of policy is new. So, don’t be surprised if some private equity firm or American telecom company comes up with a premium bid for Nokia stock.

Moreover, it’s not like a P/E ratio of 14.8x for 2021 earnings is excessively expensive. Even if a buyer paid a 25% to 30% premium, that would not increase the multiple to greater than 20x.

The upshot is that investors should buy Nokia stock for the long-term. The new management may want to improve the company’s financial performance, but this might have a different effect. It could end up making the company more attractive to a U.S.-based suitor.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/nokia-stock-new-management-5g-technology/.

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