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 tnl.net 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.
- The giants in mobile telephony have taken notice. Last year, Apple had to settle out of court over some of Nokia’s patent claims. While numbers were not made public, I’ve heard that the initial payout was north of US$500 million and that Nokia could be making between $5 and $7 in patent fees from every iPhone sold.
- 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.
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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.
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