attempting to place a value on nokia. 6TH CONVICTION BUY RECOMMENDATION BY SBM

Nokia’s latest profit warning last week and attendant announcement of massive layoffs are raising an important question in the stock market: Just how much is the cellphone company’s business really worth?

Some analysts are indeed thinking the unthinkable and now looking to value Nokia not as a going concern but simply on the value of its assets, patents and cash reserves.

Break up valuation basis

BMO Capital Markets analyst Tim Long wrote that Nokia was grinding “its way toward irrelevancy” despite the new round of restructuring and management changes. As a result, he said BMO would take a new approach in its valuation of the company and value it based on its cash and intellectual property. Mr. Long now values the company at less than $9 billion, which includes $6 billion of cash and $2.5 billion for its portfolio of patents and other intellectual property.

“We assume zero value for the device and Nokia Siemens Networks businesses,” he wrote. “We see little hope for a turnaround from here even with a refined strategy.”

Nokia warned last week that its cellphone business was deteriorating more quickly than it anticipated just two months ago, sending its shares down a further 18% last week hitting a new low of $2.28 – its lowest point since 1996. As we write they have bounced back to over $2.50.

At the current price, the company’s market capitalization is just $9.3 billion – over 90% lower than where it stood in 2007 when Apple released the iPhone.

BMO isn’t alone in assigning zero value to the company’s core mobile phone business. Analysts at Canaccord Genuity also give no credit to the money-losing operation. Some other banks have more optimistic assessments, including Nordic bank Nordea, which values the phones business alone at $3.5 billion.

Further pressure was added onto the stock with Moody’s slashing Nokia’s credit rating to junk, citing worries about its cash position and slow sales of new Windows-based phones. Credit rating firms Standard & Poor’s and Fitch Ratings also made similar moves in April.

On March 31, Nokia had gross cash balances of about $12.4 billion, and a net cash position of about $6.2 billion, down 24% from the year-ago quarter. The net cash figure doesn’t however include about $1.6 billion in restructuring costs for 2012 and 2013.

In the first quarter, Nokia reported an operating loss of $1.7 billion, as sales declined 29% due to competition from the iPhone and those devices running Android software. On Thursday, the company declined to predict when the losses would end, though it said the purpose of the layoffs and other cuts was to put the business on a sustainable footing. But that will be difficult if sales don’t pick up.

One analyst went so far as to make the following statement – “Net cash may go to zero if Nokia’s phone volumes don’t turn around”. We highly doubt this however.

Nokia could also raise money from other means. For instance, it could cut back further on its dividend (having reduced it already this year), which cost $920 million last year, said Credit Suisse. Nokia also said it would receive billions in financial support from Microsoftt alhough much of that is offset by licensing fees it must pay the software giant to use Windows software. Credit Suisse estimates Microsoft will pay Nokia about $900 million a year.

Nokia could also generate more money from selling more noncore assets and some of intellectual property with the company owning an expansive portfolio of around 30,000 patents. It currently generates around $600 million a year from royalty income. On Thursday, Nokia’s chief financial officer said it is prepared to divest some of its portfolio to raise cash at “the right price.” The portfolio of patents could be worth upto 10 times the current revenues.

At the current price of $2.50 we think the downside is now more than discounted (as with RIMM) and would not bet against Microsoft making a move on the entire company in the short term, particularly if interest is shown in other parts of the Group. At this price we move Nokia to our 6th Conviction Buy.