Nokia Corporation – Calling Contrarians

Nokia [NOK:$9.75] is the world’s largest manufacturer of cell phones with operations in Europe, the Asia-Pacific area, China, the Americas, the Middle east and Africa.

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 Cramer’s 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:

A longer-term trade:

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.

Disclosure: none