Courtesy of Paul Price.
Nokia Without the Hang-Ups – NOK
Nokia [NYSE:NOK] June 5, 2008 (9:35 AM quote): $26.57
52-week range: $26.52 (today) – $42.22 (Nov. 7, 2007)
Yield = 2.93% (before 15% foreign tax withholding on U.S. residents)
Nokia is the world’s largest maker of cell phones. They also develop and manufacture infrastructure, networking and enterprise related systems. Worldwide sales were over $75 billion in 2007 and are projected at $87 billion for 2008.
Despite an all-time record year in 2007 and a very good Q1 Nokia hit a new yearly low today at $26.52/share. Trailing 12-month EPS are now $2.34 with full year estimates of $2.50 – $2.54. Consensus views for 2009 earnings are now centered on $2.80 /share.
Nokia has a pristine balance sheet with total debt at just 1% of capital and over $11 billion in cash. Value Line rates their financial strength an ‘A+’.
The telecom craziness of 1998 – 2000 is long gone but the current valuation for NOK is extremely low by any standard. Nokia shares now trade at < 10.7 times this year’s and about 9.5 times 2009 estimates.
How cheap is that? At the exact low point in 2002’s bear market NOK shares were 12.4x that year’s EPS. If you caught the to-the-penny low in 2004 you paid 11.1x that year’s EPS. Nokia shares surged > 123% in about 20 months ($10.50 to $23.50) after their 2002 low. From its August 2004 low Nokia shares jumped 287% by November 2007.
Here are the per share data* for the past few years:
Year…… Sales…….Cash Flow……EPS……..Dividend
2007 ……$19.55 ……$2.60 ………$2.12 ……..$0.57
2006 ……$13.64 ……$1.59 ………$1.32 ……..$0.45
2005 …… $9.76 …….$1.23 ………$0.98 ……..$0.44
2004 …… $8.81 …….$1.24 ………$0.98 ……..$0.38
2003 …… $7.83 …… $1.31 ………$1.03 ……..$0.30
* source: Value Line
Over the past five years NOK has traded with average annual multiples from 13.9x to 16.8x. Even 14 times this year’s low-end expectation of $2.50 would bring these shares back to $35. That same multiple on 2009’s projection leads to a $39.20 target price over the next 19 months.
Those prices represent 7-month and 19-month total returns of 31.7% and > 50% if valuations comes back to low-normal levels.
Are those reasonable goals? Sure. Nokia touched $42.20 last November and hit $38.60 since the beginning of this year.
Want a couple of ways to Nokia with even less risk than outright ownership?
Take a look at these option combination plays:
……………………………………………………………….cash outlay cash inflow
Buy 1000 shares NOK @ $26.57………………$26,570
Sell 10 NOK Jan. $28 calls @ $2.60 $2,600
Sell 10 NOK Jan. $28 puts @ $3.60 $3,600
Net Cash Outlay……………………………………….$20,370
On expiration date (Jan. 20, 2009) if NOK shares are > $28 [ + 5.4% from today’s price]:
Your shares will be called (sold) for $28,000.
Your puts will expire worthless (a good thing for you as a seller).
You will own no shares and no options.
The $28,000 represents a gain of $7,630 or up 37.4% cash-on-cash for the 7 months of the trade. All for shares that only need to go up by 5.4% or better.
Risk?
The break-even for the shares is $26.57 less the $2.60 call premium = $23.97.
The break-even for the puts is the $28 strike less the put premium of $3.60 = $24.40.
Overall, the break-even point is $24.19 or 8.9% below your original purchase price.
Here’s a more aggressive play but one that still offers a low-risk play.
…………………………………………………………………………cash outlay cash inflow
Buy 1000 shares NOK @ $26.57………………………….$26,570
Sell 10 NOK Jan. 2010 $30 calls @ $3.80 $3,800
Sell 10 NOK Jan. 2010 $30 puts @ $6.70 $6,700
Net Cash Outlay…………………………………………………..$16,070
On expiration date in Jan. 2010 if NOK shares are > $30 [ + 12.9% from today’s price]:
Your shares will be called (sold) for $30,000.
Your puts will expire worthless (a good thing for you as a seller).
You will have received an estimated $900 in dividends.
You will own no shares and no options.
The $30,000 represents a gain of $14,830 or up 92.2% cash-on-cash for the 19 months of the trade. All for shares that only need to go up by 12.9% or better.
Risk?
The break-even for the shares is $26.57 less the $3.80 call premium = $22.77.
The break-even for the puts is the $30 strike less the put premium of $6.70 = $23.30.
Overall, the break-even point is $23.04 or 13.3% below your original purchase price.
Disclosure: Author is long Nokia shares and short NOK options.
