Are Nokia shares really undervalued?


Nokia's share price hit a 16-year low last week, dropping to €1.50 for the first time since 1996 as sentiment again moved against the struggling company.

This latest slide started after the company shocked the market last month by issuing a second profit warning in three months. Since this surprise announcement, Nokia has seen its share price decline by around 25 per cent.

Another indication of its perilous state is the cost of insuring against the company defaulting on its five-year debt, which has risen to an all time high. Nokia's market capitalisation is also plummeting (down by more than €2.5 billion from a month ago). The metrics, taken together, paint a picture of unstoppable woe for this once great company.

However, a share price of €1.50 has started to attract speculation that Nokia is being seriously undervalued. Analysts reckon that the cash (thought to be over €5 billion net) and patents held by Nokia are alone worth significantly more than its current bombed out share price valuation.

Even after holding back cash for redundancies, business restructuring and a projected loss for fiscal 2012, the company should have over €2.8 billion in net cash by the end of next year.

Putting a figure against the value of Nokia's patents is more subjective. Past sales by InterDigital and Nortel have seen prices vary between €180,000 and €600,000 per patent, so it's tricky to provide a number for Nokia's 100,000 patents. The Motley Fool suggested that Nokia's 2G, 3G and LTE patents would fall in the middle of the values achieved by InterDigital and Nortel, leading to a valuation of around €4 billion.

Adding together Nokia's cash and patent values--accepting that both have a few dangerous assumptions--this would put the company's capitalisation at just under €7 billion. This compares to its current market value of €5.5 billion.

This takes no account of Nokia's mapping business (based on its Navteq acquisition) and its 50 per cent ownership of the Nokia Siemens Network JV.

Given all this, The Motley Fool argues that Nokia could be worth around €11.4 billion, or €3 per share.

Perhaps it is an overly simplistic view, but it might provoke renewed interest by some in buying Nokia shares if they stay at €1.50.

However, the majority will likely wait until the company reveals its second quarter results later this week, with many guessing the situation will not have improved.

A poll of 38 analysts conducted by Reuters estimates that Nokia will report a second-quarter operating loss of €236 million from its handset business, almost double the €127 million loss in the previous quarter.

With Lumia handset sales still to show real signs of any traction, any turnaround at Nokia looks several quarters away--if not more.

On the surface, buying Nokia shares today should lead to a doubling of your investment. However, from bitter experience, I tend towards the view that the safest way to double your money is to fold it over once and put it in your pocket. --Paul

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