Nokia (NYSE:NOK) has a new CEO and seems to be digging itself out of its poor technological and financial situation. But, as I wrote last month, Nokia stock is still seriously undervalued.
The company has been winning lots of telecom supply deals recently. In fact, BT in the UK and a number of Asian telecom companies have signed up with Nokia for its 5G telecom systems. They chose Nokia over Huawei, its main Chinese competitor due to security concerns with the latter company.
For example, Nokia recently claimed that it signed up 17 new 5G clients in Q3. It now has 100 commercial 5G deals and listed a number of other major accomplishments in its press release.
However, the problem is Nokia stock has gone nowhere. Year-to-date it is up just 8.9% as of Oct. 9 and is down 18% over the past year. That kind of performance does not make it seem like a winner.
It also leaves the company open to a takeover. Any number of telecom or private equity companies might be convinced that they can produce much better earnings through synergies and consolidation that Nokia.
A Takeover Offer Could Undervalue Nokia
As I discussed in my article on Nokia stock on Aug. 5, management is very focused on producing free cash flow (FCF) positive. Their goal is to make at least $1.5 billion in FCF this year and build the cash balance back up.
The company has promised its shareholders that if it does so, it will consider restoring the dividend again.
But what if management does not restore the dividend? That may be what is keeping Nokia stock so cheap. Investors in the stock are not sure what is going on with the company. They don’t know whether the new CEO will work out, or whether the dividend will be restored.
In effect, they may be willing to accept any kind of takeover offer that would undervalue the stock. In my last article, I argued that Nokia stock was worth $6.74 per share. Since it is trading around just $4, that means it’s worth at least 67% more.
Shareholders might even be willing to accept a lower price, or just 30% more than today if management does not show it is able to take care of them. For example, based on a poll of analysts by Seeking Alpha, Nokia stock is trading for just 14 times 2020 earnings and 11 times 2021 forecast earnings.
The FT believes that Nokia is “vulnerable to attack” as either activists or a takeover offer could be possible. For example, the stock market value at EUR 24 billion is essentially the same as it was in 2013. This kind of performance attracts suitors who think they can do better.
What to Do With Nokia Stock
A number of analysts agree with my contention that Nokia stock is worth a good deal more. For example, TipRanks.com reports that six analysts have price targets on the stock higher than today. The average of their price forecasts is $5.31 per share or 32% more.
In addition, one analyst has a high price target of $6.30 per share or 56% above the present price.
However, Marketbeat.com reports that the consensus price target of analysts is $4.60 per share. That represents an increase of just 14.1% for Nokia stock. This is based on a poll of 13 analysts. The high price in the group was $6 per share.
Nokia is based in Finland. It may not actually be that easy for a contested takeover of one of the country’s leading technology companies and employers. Therefore, the only way a merger or acquisition would likely occur would be if management concurred.
That seems a bit unlikely at this point. For one, the new CEO just started his position on Sept. 1. He is apparently conducting a thorough review of the company’s assets and strategy. He may end up selling some of the assets that would be otherwise rationalized in a takeover.
Investors in the stock hope that they will see major changes and good earnings for the second half of the year. So far, the stock price does not reflect this. Unless something changes, expect to hear more about a potential takeover of Nokia stock.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
