Nokia (NYSE:NOK) has risen almost 12% since the company reported its excellent Q3 earnings on Oct. 29. Much of this movement in Nokia stock is related to the company’s improved outlook in sales of 5G network systems and its growth in free cash flow (FCF).
However, since my last article on Nokia stock on Oct. 13, it is down 6.95%, to $3.75 per share. I argued at the time that it is worth considerably more, up to 60%.
I still believe that this is the case, especially now that the company has improved its outlook.
Moreover, Nokia’s performance could sure use some beefing up. Year-to-date the stock is up just 1% and over the past year, it’s up just over 6%. I suspect as the market fully considers its continued FCF growth and sales gains, Nokia stock will slowly rise as well.
Earnings and Free Cash Flow
Although revenue was down 7% year-over-year to 5.294 billion EUR in Q3, it was actually not as bad a fall as last quarter. In Q2 revenue actually fell 11% year-over-year.
Moreover, compared to Q2 revenue of €5.092 billion, Q3 revenue climbed 4% quarter-over-quarter. That is good because it shows forward progress in the company’s attempt to dig out of the recession.
Nokia said in its Q3 report that the lower sales year-over-year- were due to an expected decline in network deployment services revenue. By contrast, its enterprise hardware and software revenue grew 15% year-on-year and is expected to continue to net gains.
More importantly, free cash flow (FCF) grew 20.4% to 319 million EUR from 265 million EUR last quarter. This is significant since the company has decided to focus on FCF growth not necessarily revenue growth.
A program was established in 2019 to help the company cut costs and focus on improving its FCF. This was discussed in its Q2 report by the previous CEO, but the latest Q3 report indicates the new CEO has this as a focus as well.
For example, Nokia is trying to release net working capital, optimize project assets, review contract terms to optimize supply and inventory assets, etc. The company says that working capital has fallen significantly, thereby increasing cash flow.
As a result, Nokia says FCF grew to 578 million EUR in the first nine months of 2020. This compares to a loss of 1.654 billion EUR last year, a significant gain for the company.
Outlook for 2020 and Beyond
More importantly, Nokia says that its outlook for FCF has improved to €600 million on a recurring basis for all of 2020. This also includes a variance of plus or minus €250 million.
But given that it has already achieved €578 million for the first nine months, it is likely to be closer to €850 million than lower.
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.
What to Do With Nokia Stock
Last quarter I wrote that the company is potentially vulnerable to a takeover. 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 €24 billion is essentially the same as it was in 2013. This kind of performance attracts suitors who think they can do better.
A number of analysts agree with my contention that Nokia stock is worth more. For example, TipRanks.com reports that 10 analysts have price targets on the stock higher than today. The average of their price forecasts is $4.38 per share or 17% more than today.
Moreover, Marketbeat.com reports that the consensus price target of 18 analysts is $4.90 per share. That represents an increase of 30% for Nokia stock
Investors in the stock hope they will see a major gain in FCF by the end of the year. That could potentially justify further gains in 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.