Nokia (NYSE:NOK) released its Q4 and full-year 2020 results on Feb. 4. The bottom line is that NOK stock is now worth at least 39% more, and as much as 68% more, based on its positive free cash flow (FCF).
This is now the sixth quarter that Nokia has been FCF positive. The company cut out its dividend last year until it could produce solid FCF and raise up its net cash.
Now Nokia management is saying they will assess their dividend policy. They will provide an update during its Capital Markets Day on March 18, 2021.
FCF Positive and Forward Estimate
On page 13 of the release of its Q4 results, Nokia reported that its 2020 FCF performance was 1.356 billion EUR. That includes 778 million EUR during Q4, which was significantly higher than Q3.
For example, on page 12 of its Q3 results, Nokia reported that it has only made 319 million EUR in FCF. Therefore, its Q4 FCF of 778 million EUR was 144% higher.
Moreover, last quarter the company said it only forecast 600 million EUR in FCF, plus or minus 250 million EUR. The results came in at 1.356 billion, or substantially more than the high side of its forecast of 850 million EUR.
Keep in mind that last quarter the company said it did not expect to see heavy seasonal aspects to its revenue and earnings. In the past, a large portion of its sales, earnings, and FCF came in Q4. Therefore, we can use the Q4 number to estimate its FCF going forward.
But first, we have to make an adjustment. Nokia said that its Q4 FCF benefitted from an early customer payment of 500 million EUR. Therefore, on a normalized basis, this works out to 856 million (i.e., 1.3456 billion EUR minus 500 million EUR). That is close to the 850 million EUR it previously forecast on during Q3 (see above).
Going forward, even if sales decline a bit next year, as the company seemed to be guiding, its free cash flow could actually be higher. One reason is the company has identified 250 million EUR in cost savings that will bear fruit in 2021. This is seen on page 9 of its results.
What NOK Stock Is Worth
Therefore, I suspect we can estimate 900 million EUR to 1 billion EUR in FCF for 2021. If sales stay flat or rise, the gain in FCF could actually be higher. Note that this is lower than the 1.356 billion EUR recorded in 2020. (However, that included 500 million in payments that were brought forward by one quarter.)
Assuming 1 billion EUR in FCF, this roughly translates to $1.20 billion in US dollars at today’s exchange rate. Therefore, using a 3% FCF yield, NOK stock is worth $40 billion.
Compare that to its $25.66 billion market cap today. That implies that NOK stock is worth 55.8% more than today, or $6.82 (i.e., 1.558 x $4.38 per share today, Feb. 4).
Assuming its FCF is only 900 million EUR, that works out to $1.08 billion. At 3% the market cap would be $36 billion, or 40.2% above its present $25.66 billion market cap. That implies a price of $6.14
Even if the FCF falls to just 3.5%, the market cap would be 20.8% higher than today at $5.29 per share. Therefore, if we average the valuation of all three of these scenarios, the average price is $6.08 per share or 39% above today’s price.
Alternative FCF Estimate
However, maybe I am being way too conservative. For example, in Nokia’s Q4 report on page 6, they discuss the outlook for 2021. One of the key sentences was this:
In full year 2021, Nokia expects the free cash flow performance of Nokia Technologies to be approximately EUR 600 million lower than its operating profit, primarily due to prepayments we received from certain licensees.
This implies two things. First, we can use the operating margin percent from Q4 and apply it to sales forecast. And two we would deduct 600 million EUR from that to derive FCF.
For example, let’s take a worst-case scenario and estimate a 5% reduction in sales, from 21.867 billion EUR to 20.77 billion EUR. This is in the lower part of the range that Nokia provided of between 20.6 and 21.8 billion EUR.
However, we can use a 16.6% operating margin (from its non-IFRS operating margin seen on page 2 of the results). In fact, let’s use 80% of that margin, to be conservative, or 13.28%. After all, during all of 2020, its operating margin was just 8.6%, even though this included Covid-19 quarters.
This brings its operating profits to 2.76 billion EUR (i.e., 13.28% x 20.77 billion EUR. After deducting 600 million EUR, its FCF will be 2.16 billion EUR, or $2.592 billion. That is substantially higher than my earlier estimate of $1.08 billion to $1.2 billion in FCF.
What to Do With NOK Stock
This brings the estimate for Nokia stock, using $2.592 billion at a 6% FCF yield to $43.2 billion, which is 68% above today’s price. After all, the company presently has a 6.3% FCF yield (i.e., 1.356 billion EUR, or $1.627 billion in FCF divided by its present market cap of $25.66 billion).
This implies a target price of $7.36, or 68% above its price today of $4.38. As a result, we have come up with a target price range of $6.08, 39% higher, to $7.36, 68% above today’s price.
In either case, this is a good result for most investors.
On the date of publication, Mark R. Hake did not hold a long or short position (either directly or indirectly) in any of the stocks in this article.