Earlier this month I wrote about the prospect that Nokia (NYSE:NOK), the Finnish telecommunications company, will pay a dividend at the end of the year. Based on these projections, I assessed the value of NOK shares at $ 6.63 per share.
In this article, I’ll show how Nokia’s own Free Cash Flow (FCF) forecast leads to roughly the same price target (in fact, a little higher). This means that the NOK stock, which closed at $ 5.36 on June 29, is worth at least 25% more.
It is actually very easy to come to this conclusion. The reason is that Nokia gave very concrete advice on page 2 of its most recent publication of its results on April 29. Here’s how these projections work.
Free cash flow projections
Nokia’s basic free cash flow advice can be developed from following specific guidelines:
“For the full year 2021, Nokia expects Nokia Technologies’ free cash flow performance to be approximately € 600 million lower than operating profit, mainly due to prepayments that we have received from certain licensees; “
Thus, to determine the FCF 2021 of the company, it suffices to estimate its operating profit then to subtract 600 million euros. Fortunately, Nokia has also provided guidance on operating profit. He provided a table indicating that the operating margin would be between 7% and 10%. In addition, Nokia predicts that sales for 2021 will be between € 20.6 billion and € 21.8 billion.
So using these numbers, here is how we can estimate FCF. Suppose first that sales are at the midpoint of 21.2 billion euros. At $ 1.19 per euro, that equates to $ 25.228 billion. Then we take 8.5% of that (that is, the midpoint between 7% and 10% operating margin), to get $ 2.144 billion in expected operating profit.
Next, we subtract $ 714 million (i.e. 600 million euros x $ 1.19) from the operating profit of $ 2.144. Result: 1.430 billion FCF for 2021.
If we use a 10% margin and apply it to the top revenue (21.9 billion euros), FCF’s figure is $ 1.994 billion. Thus, the FCF will be between $ 1.43 billion and $ 1.994 billion. We can use it to estimate the value of the NOK stock.
What Nokia is worth
For simplicity’s sake, let’s cautiously assume that the FCF will be between $ 1.5 billion and $ 1.6 billion, or $ 1.55 billion. Now if we use a yield measure of 4.0% FCF, we can estimate the value of the Nokia stock.
So dividing $ 1.55 billion by 4.0% yields a target market cap of $ 38.75 billion. That’s 25.73% more than the market cap of $ 30.82 billion as of June 29. In other words, the NOK share is worth 25.73% more, or $ 6.74 per share.
Note that this is very close to my original estimate of $ 6.63 per share, based on a projected dividend yield of 4.75%. This yield was determined as the midpoint between Intelligence (NASDAQ:INTC) and AT&T (NYSE:T).
So now we have two different business models to determine the value of NOK stock. Both predict it’s worth around 25% more.
What to do with NOK Stock
My projected target value is above Wall Street analysts’ forecasts. For example, TipRanks reports that 11 analysts have a average price target of $ 5.84, or 9% above today’s price. It is similar to what In search of the alpha projects too. Their survey of 12 analysts shows that the average target price is $ 5.40, near the June 29 price of $ 5.36.
Let’s say there’s a 40% chance that analysts are right and 50% chance that I’m right, with the remaining 10% with market return (say 15%). Here is how it works.
The expected total return will be 40% x 9%, or 3.6%, depending on analysts’ estimate. Using my expected return of 25%, with a 50% chance of being fair, the result is 12.5%. Finally, the 10% chance that the stock will obtain a market return of 15% leaves an expected return of 1.5%.
Thus, by adding these three possibilities, one obtains an expected total return of 17.6% (i.e. 3.6% + 12.5% + 1.5% = 17.6%). So, the odds-weighted target price for the NOK stock is $ 6.30 (i.e. $ 5.36 x 1.176). This is the result of 2 of my models (based on dividend and FCF), analysts’ estimates and a market return. This is a very good return for most investors.
As of the publication date, Mark R. Hake does not hold any titles mentioned in the article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.