Nokia Target Price Raised On Key Ingredients

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Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) will soon be free of its unprofitable devices division, which it is unloading onto Microsoft Corporation (NASDAQ:MSFT). So what’s next for the company? Analysts from various firms have differing firms about where Nokia’s future lies, with some seeing more promise in the company’s intellectual property and others seeing greater potential in NSN. Analysts at Credit Suisse are betting on multiple ingredients playing a role in Nokia’s future success.

Listing Nokia’s key ingredients

Analyst Kulbinder Garcha and the rest of the team at Credit Suisse raised their target price for Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) from €6.5 to €7.25 per share and reiterated their Outperform rating on the company. They see “significant upside potential” for Nokia within the telecom equipment industry heading into this year.

Specifically, they like the combination of Nokia’s “inexpensive valuation,” upside from intellectual property and the potential for cast distribution.

Valuing NSN

The analysts broke down what they view as a fair valuation for each of Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s vital parts. They set a value of €2.5 per share for NSN, highlighting the recent wins at China Mobile and Sprint. They believe starting this year and moving forward, NSN will start to see growth in its revenue.

They’re assuming sales of €11.2 billion in 2013 and €11.5 billion in 2014 for the division. They believe that over the long term, NSN’s operating margins will decline from 10% in 2013 to about 8%, but they said cost cutting measures and a “rational pricing environment” will serve to minimize the odds of margin declines becoming outsized.

Nokia considers strategic possibilities

They said Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) has excess distributable cash of €1.6 per share plus €2.4 billion in deferred tax assets. In addition, the Finnish company is currently conducting a strategic review process which could involve selling its intellectual property and / or HERE maps business. If this happens, the Credit Suisse team suggests that a “significant” distribution of cash could occur.

However, even if the company keeps all of its parts, they believe it has €5.9 billion in excess distributable cash. That’s more than 25% of the company’s market capitalization. In addition, even factoring the gains from the sale of the devices and services division to Microsoft, they believe Nokia’s deferred tax assets will reach as high as €2.4 billion or €.65 per share.

Possibilities exist in Nokia’s IP business

They also see “material opportunity” from Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s intellectual property division, which they value at €2.2 per share. They think the company can increase its annual royalty run-rate of €500 million by 40% if it pursues agreements with handset makers which have not currently paid to license its patents and also increases the rates on its existing licenses, which Nokia has done with its recent agreement with Samsung.

They note that about 90% of Nokia’s patents are currently unlicensed and suggest that licensing could be expanded to operating systems, chipsets—like the wins against HTC Corp (TPE:2498)—and the wider consumer electronics market. In addition, they see several companies which might want to buy Nokia’s patents, including QUALCOMM, Inc. (NASDAQ:QCOM), Intel Corporation (NASDAQ:INTC), Google Inc (NASDAQ:GOOG), Apple Inc. (NASDAQ:GOOG), Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), Huawei or even a consortium of technology companies.

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