Nokia (NOK) is one of the world’s primary providers of telecom equipment and is a Top Pick for conservative investors in the coming year, explains Bruce Kaser, editor of Cabot Turnaround Letter.
Based in Finland, the company struggled with disappointing new product initiatives including mobile phones, a lack of a major telecom upgrade cycle, a wrong-way bet on semiconductor technology, and weak leadership.
Its €15.6 billion acquisition of Alcatel-Lucent in 2016 has been a disappointment as well. Current worries include the intensely competitive environment, particularly in radio access networks, a core component in telecom systems. Nokia shares have gone nowhere in the past ten years.
New leadership, however, is refocusing and rebuilding Nokia. Pekka Lundmark helped develop Nokia’s business in the 1990s, then gained valuable business and leadership experience from impressive roles at other major companies until rejoining Nokia as CEO in late 2020. Under Lundmark, the company has corrected its semiconductor mistake, reinvigorated its sales efforts, streamlined its profit structure and is investing heavily in new product development that is lifting its market share trajectory.
These improvements are showing up in the company’s financial results. Sales growth hit 6% ex-currency and earnings per share rose 25% in the most recent quarter. The operating profit margin dipped, but this was due to a timing issue with high margin patent contracts. Nokia remains on-track to maintain and build upon its already-improved margins, even as it ramps up its technology spending.
Global telecom service providers continue to ramp their spending for the rollout of 5G technology. India has been widely cited as a large and upcoming new market. Due to security concerns, China’s Huawei is being sidelined, leaving more market share opportunities for western companies like Nokia. While the industry is highly competitive, Nokia is increasingly capable of maintaining its position, at a minimum.
Free cash flow is strong, allowing the company to now hold €4.7 billion in cash above its debt balance. With its new financial flexibility, Nokia has restored its dividend and is about half way through its €600 million share repurchase program.
The share valuation at 4.8x estimated 2023 EBITDA, is unchallenging. All-in, this under-appreciated company offers an attractive turnaround opportunity for 2023.
