Nokia: Latest Model

I have recently scaled back my estimates for revenue and margins, as well as adjusted the WACC calculation and flattened working capital estimates. I also incorporated the NSN acquisition and increased margins for this business segment.

Considering I have spent the last 7 months working on and updating this model, I am highly convinced that this version is accurate and as complete as can be at this point.

The conclusion of the model is a price target of $4.95. Using sensitivity analysis for LT Growth Rate and the WACC has given me a 1 year out price target range of $4.70 – $9.05; averaging this range gives a 1 year out price target of $6.88.

While I took some profits in the $4.20 range a couple of weeks ago, I added more earlier this week and will continue to buy more stock and options if Nokia dips below $4.

The next leg up to $5 may occur anytime between now and early October, which is when Nokia will release information and adjustments to their guidance. Short covering has commenced and will likely continue over the next month plus.


Short the CAD

Living in Canada and taking a course on FX exchange had caused me to take a look at the CAD. While I have not been able to complete a full analysis on the CAD, it appears to be substantially overvalued for a number of reasons. Most notably:

-decreases in GDP projected due to fall in commodity prices (Metals in particular, with a fall in oil possible as well in the foreseeable future due to increases in supply)
-PPP has Canadian dollar overvalued. Big Mac Index for 2013 shows CAD overvalued by close to 20% and the arguments against the Big Mac index are not valid when comparing the US to Canada.
-Support is barely holding. If the .97 level is broken, I see significant downside risk
In looking at the big picture, it makes sense for the CAD to trade in parity with the USD when the US is in a recession and commodity prices are spiking. However, the US recovery is looking quite strong and commodity prices are plunging. While Canada could benefit as a large exporter to the US, the plunge in commodity prices could cause decreases in GDP, Current Accounts and Capital Accounts. This should outweigh any benefit Canada could gain from the US recovery.
Also there are a number of catalysts in the works which could cause the US Dollar to surge. Including: Tapering off of QE3, US growth beginning to heat up, eventual rise of interest rates. All of these catalysts seem to put pressure on the CAD.

Nokia Update

With Nokia’s Q1 earnings out of the way, its time to focus on where the company can go from here. Although their Q1 earnings were a bit of a disappointment, its worthwhile to note that Nokia is just beginning to delve into their product pipeline. With multiple new products released in the past month and many more slotted for May, Nokia is slowly ramping up its marketing efforts and strong sales will likely follow. From this viewpoint, it is clear why their results did not meet expectations for Q1. However the sell off post earnings announcement did present an excellent buying opportunity. It amazes me how focused the markets are on short term results and how many opportunities are available to a savvy investor who is capable of seeing and capitalizing on longer term trends. I could go on and on about why I believe Nokia is still an excellent buy at current per share prices, but I will save you the trouble and simply mention a few key points:

  • Lumia sales are are growing quickly and Nokia’s new product launches should provide the PR boost that the company requires to gain traction in the ultra competitive smart phone market
  • Short interest in Nokia has declined rapidly over the past couple of months, falling from 9% to 7% with more covering expected. This shows that hedge funds selling Nokia shares short are slowly coming to realize that the bottom may be in, and the risk/reward potential of the Nokia short trade may no longer be in their favor.
  • I have recently switched over to the Nokia Lumia 620 and have been seriously impressed with the devices functionality. Office 365 provides impressive ability to edit Word & Excel documents. It seems that Nokia and Microsoft would benefit from  beefing up their corporate sales teams and targeting large corporations whose employees require the ability to edit important Microsoft Office documents on the go.

In the end, the argument remains the same: Nokia is still currently priced for bankruptcy, meanwhile the country of Finland would never let this happen. Nokia is the largest company in Finland, and the country would likely take any steps necessary to ensure the survival and prosperity of Nokia. More importantly, the new product launches are beginning to gain traction. With multiple media events slotted for the next couple of weeks, I look forward to gaining more insight into Nokia’s product pipeline. In other words, investments in shares of Nokia are likely to appreciate over the coming months.

I have updated my cash flow model based on the Q1 results and provided a sensitivity analysis as well.

My 12 month price target for Nokia Corp is $6.50. This is equal to roughly a .66 revenue multiple which is still extremely conservative when comparing Nokia to industry competitors. Nokia shares are currently priced at $3.41, up 11 cents or 3.33% in early trading. This provides large upside potential.

Analysis & Valuation of Nokia

After noticing the restructuring that Nokia has completed over the last few years and taking a good look at their current product line, it became clear to me that this company is turning a corner. My next step was to begin to take a look at the numbers to see if I could find quantitative support for my qualitative hypothesis. This was not an easy project as Nokia is made up of three different businesses and billions of dollars worth of intangibles in the form of Intellectual Property and Patents.


Nokia’s patents alone produce over $500 million in revenues per year, meanwhile the company is beginning to aggressively defend these patents in an attempt to provide even more revenue growth. These patents cover a wide range of technology and incorporate much of the many billions of dollars the firm has spent on Research and Development in the last couple of decades. Given that the firm can produce $500 million a year from their patent portfolio (current revenues from patents exceed this number substantially), and doing some financial analysis, one can conclude that Nokia’s patent portfolio on its own is worth about $1.50-$2.00 per share.


Due to lack of investor confidence, Nokia has made it a priority to cut down on some investments, decrease the size of the company’s balance sheet and raise cash. This is extremely important for a company going through restructuring and the firm has done extremely well in this area. As of December 31st, 2012 Nokia had cash and short term liquidable investments equal to $3.57 per share. This is substantial considering that the firm is currently trading at only $3.33 per share (as of 3/22/2013).

On to the meat of this case….

So, with patents worth about $1.75 per share and cash equal to about $3.57 per share, how can Nokia possibly be trading at $3.33? Well, the firm has been losing money at a growing pace for the last couple of years. However, their recent advances in the smartphone area with the Lumia 920, which is an extremely impressive phone, along with the company’s Asha line which has been selling well in Asia should provide the growth necessary to bring Nokia’s Devices and Services segment back to positive ground within the next couple of years. On top of this, Nokia’s partnership with Siemens has proven to be a success and has produced steady revenue growth. The firm recently issued a statement claiming that they expect this area, which has been producing revenues of close to $20 billion dollars a year to have operating margins of 5%-10% in the near future.


With all of this data collected, I began to put together my discounted cash flow model. However, I decided that the currency fluctuations of the Euro have made it difficult to forecast future cash flows for Nokia, so I went back 10 years and normalized the firms revenues by converting each years revenues and operating profits back to US dollars using the average Euro exchange rate for that year. Growth rates and margins were dramatically different per business segment and were projected primarily through statistical analysis of historical data. My projections are actually quite conservative considering the improvement potential that Nokia has. Even with negative cash flows for the next 2 years, my analysis shows that the company’s stock is still worth over $6 per share.

What this model says is that even with negative cash flows until 2016, and conservatively projected growth and operating margins, the firm is still worth $6.15 per share. Nokia is currently priced for bankruptcy at its current market price, meanwhile the company continues to innovate and improve their competitive position. This dichotomy will not last. Nokia CEO, Stephen Elop is not trying to just gain a little bit of market share, he strongly believes that Nokia can become one of the top companies in the technology field once again.

If you enjoyed this article please feel free to donate Bitcoin. I am also available to complete consulting projects and am willing take requests for research projects in return for bitcoin.

This is why Intel is extremely undervalued…

Intel Corporation (NASDAQ: INTC) had a tough year last year. Sales slowed due to many corporations tightening up their spending as a result of uncertain economic conditions. However, when looking at the larger picture, it is very clear that the average consumer is using more and more technology and devices. Also, while Intel’s sales did slow a little last year they are still the stand out leader in the semiconductor industry and they continue to expand into other areas. Their latest branding of the term “Ultrabook” has allowed consumers to quickly see which laptops are the fastest and slimmest on the market.

With these facts in mind, I decided to do a multiples analysis to see if Intel’s stock was trading in line with the industry standards. In choosing Intel’s competition in the semiconductor industry I decided to use a more systematic approach, which included looking at the holdings of some of the larger semiconductor indexes and choosing the largest holdings. Notable competitors included: Texas Instruments (NASDAQ: TXN), Sandisk Corp (NASDAQ: SNDK) & Nvidia(NASDAQ: NVDA). These three companies continue to innovate and create new products, and while Intel is definitely a more mature company, they still have the ability and resources to compete and beat their competitors.

All three of these competitors are trading at substantially higher multiples then Intel. This could be due to them all being smaller companies then Intel and the market assuming that there is a larger growth opportunities for a smaller firm, however, I take this as a sign that the market is undervaluing Intel. See comparable’s table below:


I also completed a rough discounted cash flow model which confirmed the results of the multiples analysis. All signs point to Intel being an excellent value currently. This conclusion is strengthened by the fact that Intel is currently paying a +4% dividend and also given current macroeconomic conditions which seem to be improving.

The CES in Las Vegas began this week and it will be interesting to see what Intel has in the pipeline. The company continues to innovate and I have heard rumor of a device that will compete with Apple TV. Per my analysis, I feel confident placing a buy rating on Intel with a price target of $32.50.

If you enjoyed this article please feel free to donate Bitcoin. I am also available to complete consulting projects and am willing take requests for research projects in return for bitcoin.

The Fiscal Cliff: Dodged….

Tonight our congress temporarily resolved the the fiscal cliff. While the deal may not have been the best deal that was to be had, it was a compromise and equity markets should rally heavily tomorrow. This will not be due to the deal that was struck, but more so due to the international economic strength that has been shown recently almost across the board. Most notably: Japan is engaging on an extensive easing program, US continues to ease and provide stimulus to the markets and China has picked back up.

One position I currently have which has been performing better then expected and should continue to do so is my Short Treasury Bond, Long Corporate and High Yield Bond thesis. This pair trade is speculating that the large spread between US treasury bond rates and corporate/high yield bond rates will begin to conform to historic standards. This position has been taken by using leveraged short treasury ETF’s including tickers TMV and TBT. The other side of this pairs trade has been composed by purchasing some high yield and investment graded corporate bonds through ETF’s including tickers JNK and VCLT.

All in all I am extremely satisfied with the performance of this trade and will plan on holding this one for at least the next few months as the process of closing this historically large spread may take some time. In fact, this may a be a position I will hold on to for over a year, but it all depends on how the market performs.

By the way, Happy New Year!

The Theory of Speculation

Speculation and its Impact on the Financial Markets
The topic of speculation and whether its effects on the financial markets are positive or negative has been assessed by many notable scholars. In my research I have seen strong arguments both backing speculation as a process by which equilibrium is found in the financial markets, and criticizing it by referring to the speculators as nothing more than gamblers. Although it is unlikely that any true resolution will ever come of this quarrel, my thesis proposes that there is actually a fundamental need for speculation. Nassim Taleb recognizes both sides of the argument in his book, Antifragile: Things that Gain from Disorder, where he states “… [Without] speculators…prices are more stable in general but any fluctuations cause greater panic” (Taleb). This statement identifies the only clear truth which is while speculation does assist in providing liquidity to markets and creating equilibrium, it can also exacerbate and drive volatility.

In Robert Shiller’s book, Finance and the Good Society, Shiller identifies three historic icons who serve as an excellent starting point in our discussion of speculation: Charles Conant (American Journalist, Author and Expert in Banking & Finance), Karl Marx (Legendary German Economist & Sociologist) and John Maynard Keynes (British Economist, Father of the Keynesian Economics and most prominent figure in 20th century Economics). While Marx and Keynes argue that speculation should remain in the casinos as a past time for the wealthy, Conant reflects that “…a function which occupies so important a place in the mechanism of modern business must be a useful part of that mechanism…” (Conant). He goes on to criticize those who think otherwise by stating, “…reflection seems to have little part in the equipment of the assailants of the organized markets.” Shiller suggests that there is both healthy and unhealthy speculation.

By delving into this a bit deeper, it can be deducted that there are market stabilizing speculators who are generally rational and buy when the markets are low while selling when the markets are high. The other class of speculators is the destabilizers, those who irrationally sell when the market is low and buy when the market is high. The destabilizers would be what Shiller is referring to as the unhealthy speculators as they tend to increase the volatility in the market by driving prices lower when they are already low. The problem with this is that since the destabilizers are constantly trading irrationally and losing money, they will get weeded out of the market after all of their money is gone. Milton Freedman (Nobel Prize winning American Economist and Statistician) put it simply, “People who argue that speculation is generally destabilizing seldom realize that this is largely equivalent to saying that speculators lose money” (Friedman). Not only is this true, but furthermore those that argue that speculation is unhealthy are saying that these destabilizing speculators who lose money are willing to continue to lose money by doing the same thing. This would classify them as insane for doing the same thing many times over and expecting different results. In short, the unhealthy speculators will arise as new irrational entrants to the market and then they will leave after losing too much money, going bankrupt or they will evolve into healthy speculators. This theory supports my thesis that in the end, speculation is a healthy and stabilizing force for the financial markets.

One difference that I have noticed between the two distinct schools of thought on this topic relates to the transformation in the markets that has occurred over the past couple of decades. The group of “speculation is essential” preachers seem to be a more modern crowd while the “speculation produces excess volatility” purveyors seem to be of ancient history. With the emergence of high frequency trading and the age of securitization where everything and anything can be bundled and sold, the speculation naysayers have re-emerged. The pattern shows that more often than not, in times of great market volatility pundits always come out blaming the speculators. However, in times of sustained market stabilization, there is rarely any mention of the issues that speculators pose to the market. Meanwhile, there are always speculators present. I will leave this last observation as my final argument for the position I have built.

Works Cited
Conant, Charles. “The Functions of the Stock and Produce Exchanges.” 1904.
Freidman, Milton. The Case for Flexible Exchange Rates. 1953: University of Chicago Press, n.d.
Shiller, Robert. “Finance and the Good Society.” n.d.
Taleb, Nassim Nicholas. Antifragile: Things that Gain from Disorder. Random House, 2012.

WestJet Multiples Analysis

I just completed this Comp’s/Multiples analysis for a class project and wanted to share with the blog:

With this analysis, I was also able to prepare the following valuation:

This average target price represents a 12.3% increase over what the stock is trading at. The main risk here is oil as it looks like oil prices are bottoming out. My recommendation would entail waiting for the oil cycle to reverse up and then buy WJA when oil is high as opposed to when it is low. Airline stocks serve as an excellent hedge, as they tend to go up when oil goes down and are often negatively correlated with the market.




Facebook Stock Breaking Out!

Facebook is currently breaking out above previous levels of resistance. While there are a number of catalysts that may have caused this, the two that seem to be the strongest are:

1) 800 million insider shares were released from lockup and the Facebook’s stock still went up 12% that day. This means that either one of the following or both of the following scenarios occurred: either most of the insiders did not sell or institutional investors stepped in and bought everything and more that they did sell.

2) Even more importantly, Facebook is currently working with Denver based Datalogix to show how social media advertising can reap huge rewards for companies willing to give it try. This is just the partnership needed for Facebook to begin to monetize its 1.1 billion user base. (

My quote of the week is “Facebook advertising will be the new television advertising!”