Is Nokia And Its World Leading 5G Contracts A Buy Now?
With new cases of the coronavirus spiking in the US and worldwide.
With the already historic unemployment levels and job losses in recent months.
And with many Blue-Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest today. And this number grows smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital.
And this is a huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
In recent articles I’ve shown you several stocks to avoid investing in.
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Today, I want to answer… Is Nokia And Its World Leading 5G Contracts A Buy Now?
Nokia is a leading vendor in telecommunications equipment. And the world leader in when it comes to the worlds 5G network build out.
This is the latest upgrade in cellular phone technology and speed. And Nokia’s the world leader with as of this writing 138 commercial 5G network contracts.
Its based in Espoo Finland. It has a $21.6 billion market cap. And it earns large profits. Which is reason #1 to consider buying its stock.
Nokia Earns Large Profits
Over the last decade it earned an average operating income margin of 4% per year.
I look for anything above 10%. This falls just below my threshold… But its also not the full story.
In the last 12 months as the worlds 5G buildout has accelerated its operating profit margin jumped to 7.7%.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 0.9% per year on average.
But again, this isn’t the full story.
In the last 12 months this grew to 8.7%. Which is well above my minimum threshold.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above. If a company surpasses both thresholds it makes it a great operating business that is safe and valuable.
These significant increases in both operating profit and FCF/Sales margins will continue going forward. Because this 5G buildout only really began last year. And will last for at least a decade worldwide.
Margins also increased because Nokia’s in the middle of a business transition where its working to become more focused. And its also diligently working to cut costs.
So far, these efforts have paid off enormously.
Nokia surpasses one of these important metrics while missing the mark on the other…
So, what about its debt?
Nokia Has Reasonable Debt
Nokia has $9.57 billion in cash compared to $8.14 billion in debt.
As a percentage of its balance sheet, total liabilities make up 60.9%.
Its debt makes up only 37.7% of its current market cap.
And its debt-to-equity ratio is 0.38.
These are all well below the minimum thresholds I look for when considering debt, cash, and balance sheet strength.
And this combined with its increased profits give a large margin of safety when considering buying Nokia stock.
So far Nokia looks like a good potential investment… But what about its valuation? Is it cheap?
Nokia IS Sort Of Cheap
With the markets at or near all-time highs you’d expect a good stock like Nokia to be selling at an enormous valuation.
But its not…
As of this writing its P/E is 24.
Its P/CF is 7.3.
Its forward P/E is 15.1.
And its enterprise value to operating income – EV/EBIT is 13.7.
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
This means, Nokia stock is about fairly valued right now.
Which means owning its stock gives you a small margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With Nokia being on the cusp of undervalued it doesn’t give you enough margin of safety to buy right now.
And for this reason, I recommend you avoid it for now.
However, I will keep a close eye on this and updated you as necessary because Nokia will benefit enormously from the decade long 5G network build out that is only just beginning.
If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to Depression Proof Your Portfolio – consider investing in Nokia… But only when its cheaper.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.