It appears that the Nokia (NOK) and Research in Motion (RIMM) zombies are returning from the grave. Since I first published my bearish article on the two here, the stocks have risen by 12.6% and 13.5%, respectively. Even still, The Street continues to be bearish on the two tech firms, rating them closer to a "sell" than anything else. Based on my multiples analysis and DCF model, I concur with this sentiment.
From a multiples perspective, the two vary wildly, with a high beta of around 1.7. Nokia trades at 26.2x and 16.5x past and forward earnings while Research in Motion trades at a respective 4.1x and 6x past and forward earnings. These multiples are mostly speculative and not solidly grounded in the floundering fundamentals.
At the third quarter earnings call, Nokia's CEO, Stephen Elop, began his speech by skipping the part about poor results and jumping into the promise of its turnaround story:
Welcome, ladies and gentleman, and thank you for joining us on today's earnings call. Overall, I am pleased with Nokia's results this quarter. That being said, it is important to emphasize that we are on a journey during which we are systematically transforming our company for long-term success and improved financial performance. With each step of that journey, you will see us methodically implement our strategy pursuing steady improvement through a period that has known transition risks while also dealing with the various unexpected ups and downs that typify the dynamic nature of our industry.
In its attempt to reinvest itself, Nokia has cannibalized some of its revenue streams. Lumia will eat away volumes form cheaper handsets, and the Nokia Siemens Network has thus far turned out to be a complete fiasco - burning cash for much longer than what commentators were hoping. With that said, I am attracted to how the company is laying off 26% of its staff off to lower expenses, as well with the Windows Phone partnership (MSFT).
Consensus estimates for Nokia's EPS forecast are that it will decline by 54.3% to $0.37 in 2011, decline by 10.8% in 2012, and then grow by 60.6% in 2013. Assuming a multiple of 13x and a conservative 2012 EPS of $0.31, the rough intrinsic value of the stock is $4.03, implying 28.4% downside.
Research in Motion similarly has the odds stacked up against its progress. Despite solid distribution networks, EPS forecasts are sinking. BlackBerry 2.0 OS for the Playbook may pique some interest, but it lacks the appeal of tablet substitutes, like Apple's (AAPL) iPad. Even still, the main hope that the company has going for it is PlayBook OS 2.0. This will hit the market in February and come with a variety of hot features, such as an Android player, a video store and a native email system. Analysts are forecasting 1.7M shipments in 2013. Blackberry 10 OS is also a solid attempt to bring all of the the different operating systems together, but faces competitive pressure and transition issues.
Consensus estimates for Research in Motion's EPS forecast that it will decline by 34.9% to $4.13 in 2012 and then by 28.6% and 1% more in the following two years. Assuming the multiple holds steady at 4x - and I think it will, given company-specific uncertainty, to say nothing about the macro - and 2012 EPS turns out to be 2% below consensus, the stock would fall by 32.5%. Accordingly, The Street is right to rate the stock a "sell".
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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