re: Morningstar's Todd Bernier on Nokia (12-17-01)
In my next post Todd Bernier looks at Qualcomm
>> Morningstar's Take on Nokia
12-17-01
Todd Bernier
Morningstar.com
morningstar.com
We remain long-term Nokia bulls. But a doubling in price since September--when we pounded the table for the shares--has removed much of our enthusiasm.
Nokia's recent midquarter update confirmed 2001's financial targets: The firm expects sales to grow 20% in the current quarter, and EPS will meet the consensus First Call estimate. At a time when so many others are struggling, Nokia's positive results are refreshing. The good times should continue next year, with sales forecast to grow 15%.
There is much to like at Nokia, including infallible profit margins, a bulletproof balance sheet, and excellent management. But a few recent events bother us.
Management now believes that just 380 million phones will be sold globally this year--10 million fewer than what was forecast in October, and a far cry from the 450-500 million projected just two quarters ago. For 2002, Nokia predicts overall handset volume of 420-440 million, representing growth of little better than 10%. This slow pace of growth, due to market saturation, won't improve until the sale of next-generation phones begins to take off in a year or two.
Nokia is also competing with parasitic rivals, like Motorola MOT and Ericsson ERICY, who are fighting for a place at the cell phone table. Research by Gartner Dataquest IT showed that Nokia had 33.4% of the worldwide handset market at the end of September. This represents nearly a 2-percentage-point slippage over the past two quarters; in contrast, Motorola and Ericsson had big gains. However, these rivals have heavily discounted old inventory to move it off the shelf, and they're hemorrhaging big losses. This willingness by competitors to trade losses for market share is lunacy, but it is the reality facing Nokia.
Nokia's networking business is also ailing, thanks to spending cutbacks among the wireless carriers. The wireless operators are focusing on generating positive free cash flow at the expense of unbridled subscriber growth (new users carry big upfront costs). In addition, the cash-strapped wireless carriers are saving their balance sheets for capital-intensive next-generation systems instead of expanding their network coverage. The longer carriers defer the upgrade cycle, the more miserable life will be in Nokia's wireless infrastructure segment, which accounts for roughly one fourth of its sales.
Strategy
Nokia is the king of cell phones, capitalizing on its powerful brand to introduce desirable new phones. Thinking like a consumer goods company, Nokia has succeeded in segmenting the market by providing different phones for different consumer categories. Management has put pressure on rivals who cannot match Nokia's marketing prowess and efficiency, in the process grabbing market share.
Management
Chairman and CEO Jorma Ollila is credited with reversing Nokia's fortunes in the early 1990s by transforming it into a wireless-only company. Management is considered to be very stable, with most of the top positions dominated by veteran "Nokians."
Profile
Nokia is a telecommunication and consumer electronics company. It supplies telecommunication systems and equipment for fixed, mobile, and Internet protocol networks, and markets its own cellular phones in more than 130 countries. In addition, Nokia manufactures Internet access and high-speed data transmission cellular phones, satellite receivers, mobile-battery chargers, and devices that integrate digital voice and data communications. Sales outside Europe account for about 54% of the company's total sales. It acquired Ramp Networks in January 2001.
Close Competitors TTM Sales ($Mil) Market Cap ($Mil)
Nokia ADR 28,291 101,349
Ericsson Telephone ADR B 29,943 38,365
Motorola 32,744 31,583
Nortel Networks 24,580 25,141
Lucent Technologies 21,294 24,108
Qualcomm 2,680 36,042
Data as of 01-14-02
Valuation
The shares have doubled since September, and now trade close to our fair value calculation.
Growth Grade: A
A sick global economy has caused sales growth to come to a grinding halt; September-quarter sales fell 4% sequentially. Management projects 20% growth this quarter, however, driven by new handset launches.
Profitability Grade: A+
Operating margins have held up amazingly well compared with those of other companies in the industry. Handset margins were amazing at 19% in the September quarter. Nokia's return on equity still exceeds 20%.
Financial Health Grade: A
Nokia is a cash-generating machine, and carries 4 times as much cash as interest-bearing debt. However, the firm took a $640 million hit against shareholder equity in the September period to write off some vendor financing.
Morningstar Risk: Medium
Stock Price As of 12-17-01 $25.10
Morningstar Fair Value: $24.00
Bulls Say:
* Nokia is mobile phones. Despite losing some market share recently, Nokia still has twice that of second-place Motorola. Also, consultant Interbrand rates Nokia as the world's fifth-most valuable brand--meaning that Nokia can't easily be displaced from the throne.
* The company's margins are a thing of beauty. While rivals bleed red ink, Nokia earns a 19% operating profit.
* The firm is gaining in the fast-growing wireless infrastructure market. Its share of contracts for GPRS--a prelude to third-generation (3G) networks--exceeds 50%.
* Compared with those of highly indebted rivals, Nokia's balance sheet is nirvanalike. Cash exceeds debt by 4 times.
Bears Say
* The number of handsets anticipated to be sold this year continues to fall, causing sales cycles to lengthen; the industry is in a slump. And in GPRS phones (referred to as 2.5G), rival Motorola beat Nokia to the next-generation punch.
* Nokia has lost share in each of the past two quarters, thanks to a reinvigorated Motorola.
* Demand for wireless networking gear is dead right now, as cash-strapped carriers defer the purchase of new equipment. Nokia had expected the sale of wireless infrastructure hardware to spearhead growth.
* Vendor financing reared its ugly head in the September quarter. Nokia wrote off roughly $640 million in receivables relating to customers not paying. Although vendor financing juices sales, it creates default risks.
* Competition among manufacturers for the next generation of handsets should intensify, particularly from Asian makers. <<
- Eric - |
