Nokia – materially undervalued. Corporate activity looking ever more likely.

At the current price of $3.73 (US list) Nokia looks to us to be a classic value purchase opportunity on a price to book (tangible), price to cash, yield and also on a contrarian sentiment basis – almost universally negative. Something has to give soon and we wouldn’t bet against Microsoft finally moving to swallow the company whole.

Let’s take a look at the what the various component pieces could be worth –

Nokia Siemens Networks – 40c per share

Nokia’sjoint venture with Siemens (NSN) that services and maintains their networks produced gross revenues of $19.6bn and resulted in a gross margin of 29%. Its nearest comparable Alcatel Lucent enjoyed revenues of $21.5 billion in revenue in 2011 and a gross margin of about 35%. If we apply a 20% discount for the higher margin nature of Alcatels business then NSN is possibly worth $2.8 billion. As Nokia owns 50% of the JV its part is worth circa $1.4 billion or around 4c per share.

Devices & Services – $1.80 per share

Nokia’s Devices & Services division had $33.5 billion in revenue in 2011. Sony Ericsson was bought out by Sony for $1.5 billion in October of 2011 with the former joint venture producing revenues of $7.3 billion in 2011. Sony Ericsson had a gross margin of 28% for 2011 very similar to the 27.7% of Nokia. Applying a similar multiple but adjusted for Nokia’s much larger revenus gives a comparable valuation of $6.9 billion. Nokia has 3.8 billion shares outstanding and so this valuation equates to about $1.80 per share.

Location & Commerce – 40c per share

This segment had about $1 billion in sales in 2011. One of its competitors, Telenav generated sales of $210 million (around five times less than Nokia’s location & commerce division). Based on TeleNav’s current market capitalization of $300 million, Nokia’s location & commerce is worth about $1.5 billion or 40c per share.

Conclusion

Nokia currently also sits with net cash of approx $6.4 billion or $1.68 per share. Taking a sum of the parts method to valuation and which excludes any value, for brand, goodwill or other intangibles, results in a value per share for Nokia of $4.32. Obviously a control premium for the business would add another 20-30% premium to this.

If Microsoft don’t move soon and the shares slide further I wouldn’t rule out the possiblity of a Private Equity house taking a pop at the company or in part – per our news story yesterday on their luxury Vertu division about to be snappe ub by Permira

In conclusion, if Nokia decides to sell its parts tomorrow, it will receive about 30% more than its current stock price. In my view, Nokia’s real value is even greater because it has a well-known brand, global presence, powerful research and development, and a priceless partnership with Microsoft. It appears that at under $4 per share, Nokia is grossly undervalued.