Nokia (NYSE:NOK), the Finnish telecom company, seems very undervalued now. The company produced excellent Q3 2021 results, released on Oct. 28. Moreover, NOK stock is bound to rise much higher based on recent results updates.
On Jan. 11, Nokia increased its guidance in an update on its 2021 performance and also raised its outlook for 2022 quite significantly. This will have the effect of raising the company’s free cash flow (FCF) estimate for 2022.
As a result, I now estimate that NOK is worth at least 41% more than its price today, or $8.60 per share. In fact, there is always the possibility that the company can restore its dividend, as it once promised it would consider.
Where Things Stand Now With Nokia
Nokia’s Jan. 11 update revealed that 2021 revenue will be about 22.2 billion EUR. That works out to about $25.4 billion for 2021.
Even assuming no growth next year, we can assume that this revenue rate will be good enough as an estimate for 2022. This is also a way of being conservative in our forecasts.
Now, in addition, Nokia said in its Jan. 11 update that it expects an operating margin for the financial year 2022 to range between 11% to 13.5%. That is an average of 12.25%, and applying it to the $25.4 billion in forecast sales results in operating profits of $3.11 billion.
We can use this to estimate the free cash flow (FCF) going forward. In the past, the company has said the FCF would be 600 million EUR below its operating profits. That works out to a deduction of $686.4 million from its $3.11 billion in forecast operating profits.
As a result, we can now estimate that 2022 FCF will be $2.423 billion. This may actually be too low. For example, in Q3 the company produced FCF of 700 million EUR, or about $801 million. On a run-rate basis that works out to an annual rate of $3.2 billion, or substantially more than my estimate of $2.423 billion.
What NOK Stock Is Worth
The best way to value NOK stock is to use a 5% FCF yield metric. This means we take the forecast FCF and divide it by 5% to derive its target market value.
Taking the $2.423 billion in forecast free cash flow and dividing it by 5% is mathematically equivalent multiplying it by 20. 20 times $2.423 billion works out to $48.46 billion, or approximately $48.5 billion.
At the end of trading on Jan. 12, Nokia had a market value of just $34.31 billion at a price of $6.09. That forecast value implies that Nokia is worth 41.2% more than today’s price ($48.5 billion / $34.3 billion – 1).
This also means that NOK stock is worth $8.60 per share (1.412 x $6.09).
What to Do With NOK Stock
It is possible that Nokia’s board will decide to pay a dividend for the 2021 fiscal year. This is what it said it would consider in its March 18 press release:
“After Q4 2021, the Board will assess the possibility of proposing a dividend distribution for the financial year 2021 based on the updated dividend policy.”
The updated dividend policy said that the company would “target recurring, stable and over time growing ordinary dividend payments, taking into account the previous year’s earnings as well as the company’s financial position and business outlook.”
Prior to this, it paid out variable dividends based on each quarter’s profits. But during all of 2020 and 2021, it did not yet pay any dividends.
I suspect now that the company is producing free cash flow, plus the fact that it has net cash on its balance sheet, there is a good possibility of a dividend payment.
This will also act as a catalyst to help push NOK stock closer to its underlying value.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.