Nokia: Why Its Worth $2+

by Jay Allen

Riding the wave of stock highs and lows for the past month, Nokia (NOK) has been up and down, then up and down again. Unfortunately, this trend is nothing new. For the past few years, the company has struggled to find its place in the fast-paced world of mobile communications. Once a dominating force in smartphones and other portable devices, companies like Apple (AAPL) and Google (GOOG) have managed to erase much of the company’s progress. Hovering around $2.30 per share, Nokia stock is on the rise for the seventh day in a row, but the journey will be a slow one.

Job Cuts and Downsizing

In an effort to reduce overhead and other operating costs, Nokia recently announced job cuts and the closure of one of its manufacturing plant in Salo, Finland. In addition to cutting 780 jobs by closing the plant, the company plans to cut up to 10,000 jobs worldwide. After a disappointing second quarter with sales/revenue totaling $7.54 billion, cutting jobs may help the company get back on track as the company spent $5.35 billion in COGS (Cost of Goods Sold) and $2.14 billion in S&G expenses. These expenses include salaries, manufacturing, research and development of products and services.

Reigning in excess spending by cutting back on its workforce has its upsides and downsides, however. Because the company needs to remain competitive, cutting its workforce may result in fewer products sold due to limited manufacturing. On the other hand, cutting salaries and finding other ways to reduce operating and manufacturing costs could provide additional income the company needs to survive. According to the company’s cash flow statement, Nokia currently has a net operating income of $105 million and free cash flow of -$753 million. Troubling numbers like these could prompt future layoffs and increased efforts to reduce spending for the rest of the year and into 2013.

New Products May Help

To help promote the Nokia brand, the company recently introduced two new phones aimed at specific markets. The first, launched in the Philippines, called the Nokia Asha Touch, provides smartphone service to those with limited incomes. Customers can choose between three different models which provide Internet service, texting, and other features.

The Nokia Pureview 808, launched in the US and in countries around Europe and Asia, includes a sophisticated camera and other features that smartphone users have come to expect. With these two products along with a new series of phones that will operate on Microsoft’s upcoming Windows 8 platform, Nokia hopes to regain consumer loyalty and increase sales/revenue.

Pity Play or Executive Confidence?

Given the decline of Nokia stock, it’s surprising that CEO Stephen Elop and other members of the company’s board purchased additional shares of the company. According to a spokesperson for Nokia, the move in the stock purchase was a way for executives to show the world that they still believe in what the company has to offer. Since the stock purchase by the CEO and others last week, Nokia stock has seen a steady, but slow rise. Elop purchased 275,000 shares while Chairman Risto Siilasmaa purchased 333,000 shares.

Whether investors will continue to view Nokia with skepticism remains to be seen, but this move by company executives may have instilled a little confidence in those considering dumping Nokia stock for any number of competitors including Amazon (AMZN), which has decided to enter the mobile phone market. Even companies in immersed in similar financial struggles like Research In Motion (RIMM), which manufactures BlackBerry, is currently trading around $7.00 per share, which is higher than Nokia stock right now.

Mobile phone manufacturer Ericsson (ERIC), currently trading around $9.30 per share could provide an alternative place for investors to put earnings into until Nokia picks up again.

Possible Takeover?

With financial troubles mounting and drastic cuts to its workforce pending, possible takeover attempts of Nokia by other companies would not surprise many analysts or investors. Computer maker Lenovo denied its involvement in a possible takeover, but this doesn’t mean other companies haven’t considered the possibility. Whether Nokia would be open to the idea of a takeover is unknown, but depending on how things progress, it could turn into a viable possibility down the road.

Investing in Nokia

For investors that want to beef up their portfolios with inexpensive stock and hold on to it for a long time (one year or longer), Nokia may be the deal of the day. With stock prices this low, the time is right for those who don’t mind taking a few risks. The downside is if the company goes under or if stock prices suddenly plummet and never recover. But when investors buy this low, the risk almost becomes worth it.

In the meantime, there are a host of other telecom and Internet companies investors can move to if they suffer a loss of confidence in Nokia. I think investors should carefully consider all their options, especially as the upcoming holiday season approaches. With new products and services due for launch at the end of the year, it’s possible Nokia could recoup some of its losses, and maybe even benefit from its partnership with Microsoft (MSFT). Investors should also keep in mind that once the company makes its proposed job cuts, it may have enough capital to get out of its financial troubles.

Nokia is a mixed bag for now. But I think the company can turn things around if it remains focused and ready to tackle the issues ahead. Clear management and business strategy going forward will be necessary to help the company become strong again. Unfortunately, at this time, it’s unclear how Nokia plans to proceed and if management is ready to do more than buy up some of its own stock.