Nokia (NYSE: NOK) has long had a reputation as the basket case of the wireless world. Yet it is a basket case that value and contrarian investors should take a second look at because it actually makes money.
The last set of financial numbers for Nokia, those from September 30, 2015, reveal a company that is far from a basket case. Some of the attractive numbers for Nokia from third quarter 2015 include the following:
- A net income of $1.307 billion
- A profit margin of 5.01%
- A free cash flow of $484.44 million
- A TTM revenue of $16.13 billion
- $7.873 billion in cash and short-term investments
Unfortunately, the financial numbers reveal some real problems at Nokia:
- $350.48 million in cash from operations, which is pathetic for $16.12 billion in revenues
- A diluted earnings per share figure of .3394
Yet Nokia is still rather attractive to investors. It reported a return on equity of 12.83% and a dividend yield of 4.27% for the third quarter. More importantly, it is very, very cheap right now, trading at $7.16 a share at the close of business on January 15, 2016. Unfortunately, it is also overvalued with a market cap of $26.34 billion and an enterprise value of $21.62 billion on the same day.
Nokia’s Revenue and Income Are Shrinking
The big problem at Nokia is that its revenue and income are shrinking. Nokia reported a TTM revenue of $16.13 billion in September 2015, down slightly from September 2014, when it reported a figure of $16.51 billion, and a vast improvement over September 2013, when the revenue was a dismal $3.42 billion.
That means Nokia was able to increase its revenue by nearly $13 billion in just a year, which is impressive. The problem, as the cash from operations number reveals, is that revenue is not translating into any cash, although the company does have a lot of money in the bank.
What’s more bothersome is the sudden collapse in Nokia’s income over the past year. Nokia reported a net income of $4.027 billion in September 2014, an impressive improvement over September 2013, when it reported a loss of -$808.75 million. Yet that income fell to $1.307 billion in third quarter 2015, a $2.765 billion drop.
Does Nokia Have a Future?
The roller coaster ride Nokia’s net income has been on lately shows why investors should stay away from this stock, but what about its future prospects? Is there a way that this old-line cell phone maker could be turned around in a world dominated by Apple, Android and Samsung?
That’s hard to say, but Nokia is prepared to go down fighting. The company just concluded a $16.9 billion all-share acquisition of Alcatel-Lucent (NYSE: ALU), a company that makes Nokia look like a healthy corporation in comparison. The most recent set of Alcatel-Lucent’s financial numbers reveals a company that is a sort of zombie.
On September 30, 2015, Alcatel-Lucent delivered a dismal financial report. Some of the highlights of this litany of woes include:
- A net income of -$21.24 million. That is an improvement over September 2014, when Alcatel-Lucent reported a loss of -$288.95 million.
- A profit margin of -6.01%.
- An earnings per share figure of -.0052 billion.
- Total liabilities of $22.66 billion.
The biggest losers were Alcatel-Lucent investors, who were punished with a stock price of $3.91 a share, no dividend yield and a return on equity of -0.83%. Despite that, Alcatel Lucent was actually a pretty good deal for Nokia, and here’s why.
Why Alcatel Lucent Is a Good Deal for Nokia
Interestingly enough, there were a few figures in Alcatel-Lucent’s financial reports that show the all-stock acquisition is a great deal for Nokia. They include:
- $5.969 billion in cash and short-term investments. Any deal that brings in nearly $6 billion in cash with a stock shuffle sounds good to me.
- Assets worth $24.7 billion. That means even if Nokia liquidates Alcatel-Lucent’s assets, it could make a profit of around $2.04 billion because the company’s liabilities are $22.66 billion.
- An enterprise value that exceeds the market cap. Alcatel Lucent had a market cap of $10.94 billion on January 15 and an enterprise value of $11.91 billion. That means it did gain an undervalued asset.
- $15.88 billion in additional revenue. That means the deal could nearly double Nokia’s revenue to $32.01 billion, although it is a dubious gain because Alcatel-Lucent is currently losing money on that revenue.
The Problem with Nokia’s Alcatel-Lucent Deal
The big problem with this deal is obvious: Any money that Nokia will make off it comes from financial transactions, not Alcatel-Lucent’s actual business, which is losing money. Basically, Nokia is expanding its money-losing phone business by buying a money-losing telecom in order to put some cash in its bank account.
This makes Nokia a dubious prospect, although it has been cleared to reenter the smartphone market again, RCR Wireless News reported. Nokia exited the smartphone business two years ago when it sold its device business to Microsoft (NASDAQ: MSFT).
Nobody knows what the new Nokia smartphone will look like, but the online rumor mill expects it be an Android device called the C-1. The C-1 is supposed to have a five-inch screen and will go on sale sometime this year.
Many important questions about the C-1, including where it will be made, who will make it and what it will sell for, remain to be answered. Obviously, we simply do not know enough about this gadget to make any investment decisions bases upon it.
Therefore, investors should stay away from Nokia; there is no proof that this company can actually make money. Instead, its success seems to be based upon financial speculation and hope for the future, not cash flow.