Nokia (NYSE:NOK), a Finnish telecommunications company, now seems very underestimated. The company produced excellent results in the third quarter of 2021, published on October 28. In addition, NOK shares are sure to rise much higher based on recent updates of results.
January 11 is Nokia increased its leadership in updating its performance for 2021 and also significantly raised its prospects for 2022. This will have the effect of raising the company’s Free Cash Flow Assessment (FCF) for 2022.
As a result, I now estimate that the NOK is worth at least 41% more than its current price, or $ 8.60 per share. In fact, there is always the possibility that a company can recoup its dividends, as it once promised to consider.
Where are things now with Nokia
Nokia’s January 11 update revealed that revenue will be around € 22.2 billion in 2021. That’s about $ 25.4 billion for 2021.
Even assuming no growth next year, we can assume that this revenue level will be good enough as the estimate for 2022. This is also the way we are conservative in our forecasts.
Now, in addition, Nokia said in its January 11 update that it expects the operating margin for the financial year 2022 to be between 11% and 13.5%. That’s an average of 12.25%, and if we use it for projected sales of $ 25.4 billion, operating profit is $ 3.11 billion.
This can be used to estimate Free Cash Flow (FCF) going forward. In the past, the company has claimed to be FCF EUR 600 million below operating profit. That represents a deduction of $ 686.4 million from the $ 3.11 billion projected operating profit.
As a result, we can now estimate that the FCF for 2022 will be $ 2.423 billion. This may actually be too low. For example, in the third quarter, the company produced FCF of $ 700 million, or about $ 801 million. Based on current rates, it reaches an annual rate of $ 3.2 billion, which is significantly more than my estimate of $ 2.423 billion.
How much are NOK stocks worth?
The best way to value NOK shares is to use the 5% FCF yield metric. This means taking the FCF forecast and dividing it by 5% to derive its target market value.
If we take $ 2.423 billion of the predicted free cash flow and divide it by 5%, it is mathematically equivalent if we multiply it by 20. 20 times $ 2.423 billion is $ 48.46 billion or about $ 48.5 billion.
At the close of trading on January 12, Nokia had a market value of only $ 34.31 billion at a price of $ 6.09. This forecast value means that Nokia is worth 41.2% more than today’s price (USD 48.5 billion / USD 34.3 billion – 1).
This also means that a NOK share is worth $ 8.60 per share ($ 1,412 x $ 6.09).
What to do with NOK stocks
It is possible that the management of Nokia will decide to pay dividends for the financial year 2021. This is what he said he would take into account in his Press release March 18:
“After the fourth quarter of 2021, the board of directors will assess the possibility of proposing a dividend distribution for the financial year 2021 on the basis of an updated dividend policy.”
The updated dividend policy stated that the company would “target recurring, stable and, over time, ordinary dividend payments, taking into account the previous year’s profit and the company’s financial position and business prospects.”
Prior to that, it paid variable dividends based on quarterly earnings. But in all the years 2020 and 2021, it has not yet paid any dividends.
I suspect that now that the company is producing free cash flow, in addition to having net cash on its balance sheet, there is a good chance of paying dividends.
This will also act as a catalyst to help bring NOK shares closer to base value.
At the date of publication, Mark R. Hake had no position (direct or indirect) in the securities mentioned in this article. The opinions expressed in this article are the opinions of the writer who are the subject InvestorPlace.com Guidelines for publication.