I think you are right. Of all possible means, share dilution seems to be the worst. Playing games on the equity side is dangerous for any company. As shareholders the usual feeling is that it is at our expense.
Yes, that is an option too. But it all depends on the price. Chances are, as shareholders, we will pay a premium if Nokia buys part or all ALU, whether they use cash or bonds. It should be easier to calculate the intrinsic value when it is your own company that you are valuing. As Warren Buffet says: "There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds -- cash plus sensible borrowing capacity -- beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated". "Sensible borrowing capacity" might have a broad meaning. Often companies issue bonds, instead of paying cash to make buybacks because they are taxed below the price that should be paid if those where direct purchases. That´s why I was talking about share price as a condition. But you made a good point. I could happen that buying ALU that way becomes a better option. We´ll see!
Money is going to flow into the European markets at a rate of 60 billion a month at 2%, but stating in March both to the private and the public sectors. Actual return on invested capital or ROIC at Nokia comes to about 45% last quarter, but let me be very conservative this time and I'll say it is just 10%. Also, because the first quarter is always the worst seasonally (Nokia always remind us that) return suffers, but that's ok.
They do buybacks now. But I think there is no rush for the reasons mentioned above. Later, they can issue bonds at a very low rate for larger share buybacks, for what happened in the US will obviously happen in Europe. Although, buybacks do not suit many companies, regardless of how cheap is the borrowing, I think we would agree that Nokia is well suited for that buyback strategy. All other things equal, mainly the price, it is better to start on march. If price goes down a lot, they could do it now. Having those alternatives is nice, isn't it? :)_
This last 2014 quarter Nokia increased R&D by 15% year over year to 487 million euros , and it´s operating profit increased 28% year over year (that is, after R&D) to 524 million euros. But I will make conservative assumptions:
For example, Nokia´s value brand, which was valued at 3,600 million euros in 2014, does not recover or spike. It´s value is 0. Yes, it´s licensed tablet N1 can´t not meet the demand for it, but I take that away from total asset - total liabilities, which net comes to 8,668 million euros. So we have now just 5,068 million euros in tangible book value.
Let´s further assume that there is not growth next year. So we just take that 524 millionX4, or 2,096 million euros. The return on that remains the same.
Nokia market cap today in euros is 25,765 million. I have made a conservative value of the tangible assets, but since Nokia is a “going concern”, I get those 5,068 million euros, plus earning power of 2,096 million euros a year.
If it was a business that you could buy or that you had entarely, would you buy it or sell considering those assumptions? I think it is interesting to see it this way.
I wonder how many actually read the whole finantial report instead of reading the price at any given moment. When you do, It becomes fairly clear that all business division are growing, but not at any cost, as they want (here you see another "intaglible": Finnish are also shy when it comes to over-spending). Nevertheless, they will invest more in the three segments in 2015. You don't invest when there is not market for that investement, all simple as that, especially a Finnish mentality now on board again.
But then we have another interesting situation that will (could if you want) develop: First the obvious, Nokia is a European company. Quantitive easing in Europe is actually quicking in on march. When a company has such a good finantial position, but interest rates become so low (actually negative) and stay there for a long time, while ECB money flows into the economy; and when a company also has a fairly decent return on capital, far above those interest rates, chances are, you will start buying back shares when ever you see an atracttive price. But Nokia, as many other companies, might rather just finance those share repruchases, than use it´s pile of cash (for a large amount of cash is your key to further investment, AND to get really low rates on your borrowing).
So, while it is never impossible to see the price dropping $1 or more, I would actually love to see that as a long term investor. Nokia should too, as in those instances, share repurchases become a no brainer. Yet, again, many people will keep following the day to day, or even minute to minute price.
So, let me understand this. It went on pre-order just yesterday, 566.438 tried to reserve it, but there were only 20.000, that sold out in 4 minutes? Something must be wrong with these numbers...just too good to be true for those of us who are still long term investors.
In december, Xiaomi sold out 40.000 Redmi Note 4G in India in six seconds (whatever with the record time!) but 200.000 people registered. It was huge news.
I know it is a Foxconn product, but designed by Nokia. Not the other way around.
I also do know what the brand Nokia still means in another countries (It never meant much in the U.S), but those numbers are crazy. I hope Nokia still controls the quality of the next products it licenses, and hope this first lives to the expectations. There are many ways of licensing. Some are "I don´t really care what you do once you pay". I remember the case of Pierre Cardin, which ended badly for that reason. Obviously, Nokia has to go the other way.
Right now, I am impressed.