MorningWord 10/11/12: NOK From Wallflower to the Belle Of the Ball?

by Dan October 11, 2012 9:01 am • Commentary

MorningWord 10/11/12:  Last night, in his Too Many Options, Enis flagged a large options trade that caught me by surprise in NOK.  Someone bought 44k of the Jan14 5 calls for .37, with a break-even in 15 months more than 100% higher than current levels.  NOK sits about 65% off of its 52 week highs, about 55% off of the 52 week, and 15 year lows made in July.   The company, and the stock for that matter, has been relegated to the once dominant but now also ran category among handset makers (see RIMM & MOT).  

Just to put things in perspective, AAPL’s Q3 revenues  alone of $35 billion will be greater than NOK’s expected full year 2012 revenues of about $29 billion.  Of AAPL’s $35 billion $25 billion can be attributed to iPhone and iPads.  Make no mistake about it, many of NOK’s woes have been self inflicted, but AAPL’s emergence to the mobile space was kind of the nail in the coffin.  In 2007 when AAPL introduced the iPhone, NOK reported record sales of $51 billion, which has steadily declined ever since.

Yesterday’s trade was interesting to me because I read a blog post from last week entitled Why Apple Should Acquire Nokia.  Here are a few of the highlights from the post:

  • A large por­tion of progress in the mobile space will be dic­tated by the avail­abil­ity and own­er­ship of patents. While Apple and Sam­sung are most famous for their spe­cific fights over patented tech­nolo­gies and approaches, Nokia has qui­etly built up a very strong and rel­a­tively young patent port­fo­lio
  • A 2011 sur­vey showed that Nokia was the largest patent holder for essen­tial tech­nolo­gies relat­ing to LTE.
  • In fact, Nokia’s patent port­fo­lio may be valu­able enough on its own to jus­tify buy­ing the com­pany. With ana­lyst putting its value at any­where between US$6 and US$10 bil­lion, one could buy a patent port­fo­lio and get a telecom­mu­ni­ca­tion and map­ping com­pany for almost free.
  • Nokia has made a num­ber of bets on loca­tion and map­ping, with the 2007 U$8 bil­lion acqui­si­tion of Navteq. This acqui­si­tion made Nokia the largest provider of map­ping ser­vices in the world. In fact, the com­pany pro­vides map­ping ser­vices to Google, UPS, Fedex, and many of the largest play­ers in the auto­mo­tive industry.
  • When looked at in con­trast to the recent release of Apple maps, it seems that this invest­ment is one that would greatly ben­e­fit Apple and allow it to quickly catch up and sur­pass Google. The com­pany could decide that it would not renew its offer­ing to Google when that con­tract expires, forc­ing the search giant to go and build out a greater capa­bil­ity in that arena if it wants to retain its lead in the space.
  • Of course, an acqui­si­tion of Nokia would have quite an impact on Microsoft as it tries to make its way back into the mobile space. With Nokia as its most impor­tant part­ner, Microsoft’s hope to become a likely con­tender for con­sumers’ hearts might be dealt some­thing pretty close to a death­blow.
  • Mean­while, the increase in the size of the patent port­fo­lio Apple would con­trol would prob­a­bly have a large impact on the company’s law­suits against Android man­u­fac­tur­ers. In a world where Android is promi­nent that you get a free Android phone when you buy a mag­a­zine, Apple’s law­suits could even­tu­ally start cut­ting into that rate of growth.

Maybe yesterday’s buyer read this opinion last week as I did and was equally intrigued by NOK’s $5 billion enterprise value and the how the sum of the parts could far outweigh the risks to their hardware business near term.  Additionally given MSFT’s reliance on NOK given their recent smart-phone partnership, any interest by a competitor such as AAPL would force MSFT into the bidding.  NOK’s Q3 is likely to be horrible, and given the stock’s recent 50% rally of the lows it may make sense to wait for the next dip to step in, but given the recent M&A activity in the wireless services space (PCS/T-Mob and this mornings report of Softbank for Sprint) traders may not be able to contain themselves as the lower dollar stock, and the low dollar premiums in NOK allow for low notional exposure with large amount of shares or contracts.




MorningWord 10/10/12:  Last night YUM reported Q3 earnings that were better than expected, while revs were a tad light, but slightly raised FY2012 eps growth forecast from at least 12% to at least 13%.  As it relates to China, where they will see much of their future growth and receive about 45% of their current revenues, the company reported comp store sales in line with consensus and suggested they will open 750 stores in China this year, up from previous target of 700.  I guess the most interesting take-away from the report, is that while most investors were focused on China being the cause for concern (me included), many had expected the U.S. to be weak after seeing disappointing results this summer in the U.S. from MCD and CMG.  U.S. comp sales were actually better than expected, up 6% vs the estimate of up 4.4%.  Could YUM’s U.S. performance be a result of one of the main tenets of hedge fund manager David Einhorn’s short thesis on CMG that he laid out nearly 2 weeks ago at the Value Investing Congress?  His view on CMG (he declined to offer and investment opinion on YUM) is that Taco Bell’s New Upscale Menu in the U.S. may eat CMG’s lunch so to speak.  Some guys are just really good at this.

The stock is up about 4.5% in the pre-market in line with the implied move, as investors’ worries about slowing sales in China are allayed for now and the U.S. is outperforming.  This is one fast food chain that appears to be bucking the trend.

Yesterday prior to the close,  I adjusted a bearish position in YUM that I have had on for 2 months, and rolled up and out a bit, my new position as of yesterday’s close is long the Nov 65/60 Put Spread after taking a loss on the Oct 62.5/55 Put Spread.  In the post I outlined 3 options for my Oct trade and how I was thinking about going forward, and they were:

1. Sell the Spread for a loss and wait for the news to come out and then make a decision about how to express the bearish view if the news confirms the thesis (albeit at lower levels).
2. Sell the spread and roll to higher strikes and possibly even out to Nov in an effort to stay in the game.
3. Leave the position on and play for an out sized move post earnings.

In hindsight, number one was the right option, but here is the thing, if I am going to trade earnings, which I do frequently, I have to go with what I feel my best trade ideas are, knowing that I will not always be right.  The prudent thing to do would have been to take a step back after 2 months in the trade, and wait for the news to come out and make my next move with the knowledge of the results.  At this point, I am just wrong on the story, or maybe my timing is wrong, but now I have had 2 losing trades in the course of 2 months in the name, and it is likely time to bail and move on.  I will officially update this trade this morning, after I see how the stock trades.

On another note, Enis nailed CMI with a Bearish play into their Q3 earnings and will get paid early after last night’s negative pre-announcement.  Whats interesting about CMI is that their exposure to China is obviously one of the main drags on the company.  Also last night, AA once again cut their demand forecast for Aluminum due to weakness in China.  Both China related warnings come on the heals of FDX and NKE’s results in the last month that also both signaled to weakness in China.