It’s been more than six months since I last wrote about Nokia (NYSE:NOK), suggesting NOK stock was fully valued at the then-$4.28 price per share.
At that point, the Finnish telecom hardware sensation was planning to cut 10,000 jobs in ordr to redirect $715 million in annual savings toward its 5G efforts and other potential growth areas.
What of that assessment of “fully valued”? Thanks to misguided memes, Redditors,and Robinhood retail investors, NOK stock charged ahead to $5.44, 27% higher than in March.
As Roy Kent from AppleTV’s Ted Lasso would say: “bloody hell.”
Thankfully, the geniuses at Reddit’s r/WallStreetBets have finally given up on Nokia. As a result, it’s no longer in the top 25 for comments.
As we speak, Nokia’s market capitalization is $31.1 billion. Meanwhile, GPS tech maker Garmin (NASDAQ:GRMN), the GPS technology company, has a market cap of $30.6 billion, just half a billion dollars less.
For my money, Garmin is easily the better bet of the two tech stocks. However, the numbers might suggest something different.
NOK Stock Has FCF Yield of 7.0%
Based on trailing 12-month (TTM) free cash flow (FCF) of 2.19 billion EUR ($2.54 billion), Nokia’s FCF yield is 7.0%. I consider anything 8% or higher to be in value territory. Therefore, yields between 4% and 8% would be regarded as growth at a reasonable price. That’s good if you own NOK stock. As for Garmin, it has an FCF yield of 3.5%, putting it below the 4% range where I generally begin to look at stocks.
So, Nokia’s a better buy? Not so fast.
In Garmin’s TTM through Q2 2021, it had revenue of $4.86 billion, 45% higher than its 2018 sales. On the other hand, Nokia’s TTM revenue through Q2 2021 was the euro equivalent of $25.8 billion, 1.4% less than in 2018.
Regarding TTM operating income, Garmin’s was $1.31 billion, 68% higher than in 2018. Nokia’s was $2.15 billion, 461% higher than in 2018. In both cases, their operating incomes have grown substantially over 30 months.
Given Nokia’s 5G potential, it appears that the risk-to-reward proposition tilts in its favor over Garmin.
Is there anything that puts Garmin ahead of Nokia?
Balance Sheet Might Sway You
When it comes to investing, I like a margin of safety. You can often find that with a strong balance sheet.
In the case of Garmin, its TTM net cash is $1.9 billion, while Nokia’s is $3.3 billion in the equivalent euros, or 74% higher. So it’s not looking good for the maker of GPS navigation systems.
However, Garmin shines in metrics like return on assets (17.38%) and return on equity (22.93%). The reality is that while Garmin makes plenty of net income, Nokia does not, and that’s all that matters with these two metrics.
If we use operating income, here’s how things shake out.
Nokia’s TTM operating income is 1.85 billion EUR. That gives it a return on assets of 5.0% and a return on equity of 12.9%, or respectively 1,238, and 1,003 basis points less than Garmin.
The Bottom Line
InvestorPlace’s resident number cruncher is Mark Hake. He loves tapping away at his calculator. It’s a relief to know his CFA studies didn’t go to waste.
Anyway, he believes NOK stock is worth more than $7.50 based on its FCF estimate. That’s 38% upside as I write this. And if it reinstates the dividend, Hake believes $7.50 is a very conservative estimate.
In my March article about Nokia, I pointed out that Ericsson (NASDAQ:ERIC), its Swedish rival, created 10,563 jobs between 2010 and 2020, while Nokia cut 37,316 jobs over the same period.
“You don’t have to be a rocket scientist to understand what this table is telling you,” I wrote on March 17. “That Nokia hasn’t been a job creator for some time. Job creation equals innovation. By cutting 10,000 employees, Lundmark [CEO Pekka Lundmark] might as well come out and tell the world Nokia’s innovation days have long since left the building.”
Over the same decade, Garmin grew its employee base by 6.04%, compounded annually from 8,897 in 2010 to 16,000 at the end of 2020. That’s slightly better than Microsoft (NASDAQ:MSFT).
From where I sit, Garmin is the better $30-billion buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
