Nokia (NYSE:NOK), the Finnish telecom company, looks to be very undervalued now. Its stellar second-quarter results, released on July 29, show that the company is producing good growth and large amounts of free cash flow. Moreover, the company raised its outlook for 2021 growth. This implies that NOK stock is worth even more than my previous estimate.
In my last article on June 30, I wrote that NOK stock was worth $6.74 per share. I now think it could be worth substantially more at $7.59. This is based on the company’s updated outlook and profit forecasts.
Where Things Stand With Nokia
On July 29, Nokia reported sales up 9% on a constant currency basis, driven by growth across all its business segments. It also reported a gross margin of 42% and an operating margin of 12.8% vs. 9% in last year’s Q2.
Most importantly, the company raised its outlook for the full year. For example, it expects net sales to be 21.7 billion euros to 22.7 billion euros (previously 20.6 billion euros to 21.8 billion euros). At today’s exchange rate of $1.1829 per euro, that works out to a range from $25.67 billion to $26.85 billion. The midpoint of these is $26.26 billion. We can use this to estimate the value of NOK stock.
Moreover, the company raised its operating margin outlook to between 10% and 12% (previously 7%-10%). Therefore, this means at the midpoint, its operating margin of 11% multiplied by the $26.26 billion 2021 estimate will result in $2.889 billion in operating profits.
On page 2 of its earnings release, Nokia also says that it expects free cash flow (FCF) will be EUR 600 million below its operating profit. That means we can subtract $710 million from its $2.889 billion in expected operating profits. So we can use a FCF estimate of $2.179 billion to value NOK stock.
What NOK Stock Is Worth
In my last article, I used a 4% FCF yield to value NOK stock. This means that I took the forecast FCF and divided it by 4% to derive its target market value. But now, to be even more conservative, I have decided to use a higher rate, 5%. As you know, dividing a number by a higher number results in an otherwise lower number. That is why it is more conservative.
So, dividing by $2.179 billion in forecast FCF by 5% results in a target market value of $43.58 billion. This is 28.8% higher than Nokia’s present market value of $33.832 billion, as calculated by Yahoo! Finance (which I think typically has the most accurate market cap calculations).
In other words, NOK stock could be worth 28.8% than $5.89, its price as of Sept. 8 closing, or $7.59 per share. That estimate is based on Nokia’s midpoint sales forecast, an 11% operating margin, FCF estimates $710 million below its operating profit, and a 5% FCF yield.
Issues With NOK Stock
My target value is above Wall Street analysts’ targets. For example, TipRanks reports that 13 analysts have an average target price of $7.01, or 19% above today’s price.
This is similar to what Seeking Alpha projects as well. Their survey of 12 analysts shows that the average price target is $7.20.
I would also note that most analysts have raised their price targets substantially from when I last wrote about Nokia. As a result, there is no need to use a probability model to weigh my price target with probabilities along with other analysts’ targets, like I did last time.
In fact, I believe we can also start thinking about using 2022 revenue and operating margin estimates. However, I want to wait until its Q3 numbers come out to confirm that the company’s profit outlook looks stable.
One area of concern that I have is that some of its improved performance has come from winning contracts in China. However, as page 4 of the earnings release shows, China represents about 7% of its total, or 374 million euros of its total 5.313 billion euros in total quarterly sales. So, in the end, this is not its largest contribution to growth. Latin America, India, and Europe are still the largest contributors.
What to Do With NOK Stock
Now is probably a good time to begin building a small stake in NOK stock, given that the company has returned to growth. As a result, my best estimate is that it is worth at least $7.59 per share.
And don’t forget, the company used to pay a dividend. I still think that it is possible they will consider reinstating this dividend. This could be the case once its full-year results are announced sometime in the first quarter.
On the date of publication, Mark R. Hake did not hold any position, directly or indirectly, in any of the securities mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
