Nokia Corporation (ADR) (NOK) Stake In NSN: SoTP Scenarios

In light of Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s purchase of the stake in NSN it did not own, analysts from JPMorgan present several sum-of-the-part scenarios to take into account the new reality. Based on their analysis, even in the worst case where Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)  has to fund €3bn to shut down the smartphone business, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) stock should be valued near where it is currently valued. Thus in analysts view by purchasing the part of NSN that it did not own and thus owning that cash flow, the bear thesis on Nokia stock is mostly history.

Nokia Corporation (ADR) (NOK) Stake In NSN: SoTP Scenarios

Nokia could be worth as much as €5.96

If a track record is built at NSN over next 12-18 months, smartphones shows some traction & can be valued/sold for 0.25x sales – stock could double. Though Siemens sold NSN for only 0.2x ’13 EV/sales, analysts believe that is a function of their lack of interest in a volatile tech business. If NSN can show margin progress as we are forecasting in ’13 with FY13 EBIT of 9.3%, then as a track record is built, in 12-18 months, market could value NSN as high as 1x EV/sales. Coupled with NSN progress, if smartphones show recovery on the back of the improved supply chain data point of NNokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) raising component orders for Lumia from 30m to 45m that JPM analysts cited in their note “Nokia: End game is near. … Upgrade to OW”, they calculate Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) could be worth as much as €5.96 or almost 2x the current share price.

On a cautious view if one values NSN at 0.5x EV/sales, i.e. 5% margin over the cycle, values cash value of running mobile phone for cash at €1.06bn, location & commerce at approx. €1bn, patent portfolio per Nortel precedent & assign no value to net cash, then market is factoring over €3bn cost of re-structuring & potentially shutting the smartphone business. Thus in analysts view, downside risk to the stock from smartphone restructuring is low. Only if Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) makes a major inventory write-down from demand miscalculation would there be downside risk.

Under the valuation scenarios, Nokia stock should be valued at €3.02 to €5.96:

Depending upon whether the market values NSN at 0.5x EV/sales or at 1x EV/sales based on the track record created and whether smartphones will be ascribed some value due to volume ramp indicated currently in the supply chain (45m Lumias in ’13) or market continues to value large cash cost fo restructuring, analysts calculate Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) stock is worth between €3.02 and €5.96. Thus they believe the bear thesis on the stock is minimal at this point. Analysts have a Jun-14 PT of €3.6 based on probability weighted SoTP.