Is It Too Late to Get Into Loeb's New Trade?
Loeb's Reasons to Buy Nokia
According to Third Point's estimates, Nokia holds cash reserves of over $11 billion after Microsoft's acquisition. Clearly, Loeb thinks there is no need for the “new Nokia” to hold such a huge amount of cash. Hence, a strong share buy-back or a special dividend should be on management's cards. Is it really no need for huge cash reserves? I agree with Loeb. After the sale of its struggling handset business, Nokia will have three business lines: Its wireless infrastructure business (NSN), which shall be the core of the new company, its mapping business, and a large IP portfolio to monetize. All three business lines will surely continue to be profitable, stable and cash flow generating.
As a matter of fact, for the third quarter of the year it would be realistic to expect Nokia to deliver group sales of $8 billion (+6% quarter-over-quarter) and an operating profit of $175 million. This facts, added to an estimated 2014 free cash flow (FCF) generation for its NSN business of just over $215 million, makes the case even clearer. Loeb is right. Nokia has no need for huge cash reserves. If a cash return to shareholders is not on management's plan, the activist investor will put his trademark pressure tactics on play in order to make the cash return possible.
Even when we take into a account a reasonable -although huge- cash distribution of $6 billion (which represents over 22% of the company's current market capitalization), Nokia's valuation already seems somewhat rich. According to Credit Suisse's analysts, in 2014, Nokia could generate an EBITDA as high as $2.4 billion. This would translate into a multiple of 2014 8.9 times EV/EBITDA.
Has Loeb made a mistake? I don’t think so. He bought a while ago and Nokia's shares are up by almost 85% during the last 12 weeks (three months). Even when I think the cash distribution will finally materialize, I also think such cash distribution is already reflected into the company's price. Remember “price is what you give and value is what you get.”
The good news is that Nokia is finally a sustainable business. The company's handset operations were a drag which has been finally eliminated. What is left is a much more stable and sustainable company with a strong cash flow generation. The bad news is that now it's too late to get into the trade. The share price already discounts the huge cash distribution which will most surely happen.