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The 2008 – 2009 recession took a heavy toll on sales and earnings. EPS dropped from a record $2.12 in 2007 to $0.94 in 2009. It is expected that they will bottom out this year at $0.86 - $0.87 before rebounding to about $1.05 or better in 2011.
NOK shares have reflected the fundamentals. They peaked at $42.20 in late 2007 and troughed at $8.50/share when the entire market hit bottom in March of 2009. Since then they’ve been as high as $16 again on the way to today’s sub-$10 quote.
The depressed conditions seem fully discounted in the price at the current P/E of about 11.9x this year’s estimate and around 9.3x the 2011 estimates. NOK meets the criteria for an ‘accidental high yielder’ as well. The annual payout was $0.56 /share this spring for a current yield (before 15% Finnish tax withholding) of 5.7%.
Over the past 5 years NOK has generally traded for 13 – 15 times earnings. Thirteen times this year’s estimate of $0.82 would bring the shares back to $10.66 by year-end. That same multiple on next year’s projections leads to a $13.65 end of 2011 target price.
Are those achievable? If anything they’re probably way too conservative. NOK has touched highs of $15.20 and up during each calendar year since 1998, including this year. Standard and Poors rates NOK as a 5-star stock (their top ranking) and carries a 12-month goal price of $15.
Investors with a 1 - 2 year time horizon might want to just own some shares. Option writers should consider putting on these buy/write positions:
A trade to January 2011:
Cash Outlay | Cash Inflow | |
Buy 1000 NOK @ $9.75 /share | $9,750 | |
Sell 10 Jan. 2011 $10 calls @ $1.10 /share | $1,100 | |
Sell 10 Jan. 2011 $10 puts @ $1.35 /share | $1,350 | |
Net Cash Out-of-Pocket | $7,300 |
A longer-term trade:
Cash Outlay | Cash Inflow | |
Buy 1000 NOK @ $9.75 /share | $9,750 | |
Sell 10 Jan. 2012 $10 calls @ $2.00 /share | $2,000 | |
Sell 10 Jan. 2012 $10 puts @ $2.20 /share | $2,200 | |
Net Cash Out-of-Pocket | $5,550 |
In each case the best-case scenario is captured if NOK merely rises by $0.25 /share by their respective expiration dates.
The net profit on the shorter-term trade [if NOK is $10 or higher on Jan. 22, 2011] would be $2,700/$7,300 = 36.9%. Not too shabby on any gain of 2.6% or better over the next 7 months or so.
The net profit on the 2012 expiration combination [if NOK is $10 or higher on Jan. 21, 2012] would be $4,450/$5,550 = 80% plus the spring of 2011 dividend payment.
Once again that would represent a terrific gain on any move up of 2.6% or more over the 19+ months from start to finish.
Break-evens on the trades:
For the 2011 series- $8.78 /share or 10% below the trade inception price of $9.75.
For the 2012 series- $7.90 /share or 18.9% below the trade origination price.
Dr. Paul Price
Disclosure: none
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I don't follow the same investment techniques as yourself but I like your pick here. I was takign a cursory look at Motorla recently and never realized how out-of-favour Nokia is. Sure, its competitive position is declining but it's still a cash cow. If it can maintain free cash flow above $3 billion per year, it should do well.
The question, though, is whether we are looking at a company that will see a catastrohpic collapse in their business in the future (e.g. as smartphones replace normal phones) or whether it will battle to keep generating those cash flows (perhaps in poorer countries.) An example of the first would something like Sun in the early 2000's, when it faced a plunge off a cliff as its servers and services literally became obsolete overnight (I'm exaggerating.)