re: The Globe and Mail on Nokia "Prudence"
globetechnology.com
>> Prudence Adds To Nokia's Value
Amanda Lang
The Globe and Mail
Canada
December 9, 2002
It isn't that unusual for a company to disagree with the forecasting made by Wall Street analysts. Despite criticism of too-close relationships between analysts and the corporations they cover, there is often divergence on points of conjecture. But normally, the roles are pretty clear: corporate executives complaining that analysts are overly downbeat, and analysts wary of company hype.
It is less typical to find a company expressing pessimism, the analyst starry-eyed optimism. But so it is with Finland's Nokia Corp.
The world's largest mobile phone maker offers a mid-quarter update Wednesday. At that point, perhaps it will become clearer to investors whether they should believe the company when it says sales of its mobile phones will rise 10 per cent next year, or whether they should believe Merrill Lynch, which sees much higher growth.
In a research note to clients published last week, Merrill raised its investment rating on Nokia stock to "buy" from "neutral," and cited two reasons. First, Merrill expects mobile phone sales worldwide will be higher than it had previously forecast, and second, that Nokia will take an even bigger share of that growing market.
It's significant that Merrill isn't just raising its view of how many people will buy new phones -- it's actually changing the way it thinks about new phone sales. Merrill now estimates 474 million new phones will be sold worldwide next year, compared with other analysts' predictions of 435 million.
Early expectations for cellphone purchase rates have been ratcheted back, partly because of economic weakness, but also because three years ago many people thought mobile phone users would update their devices more frequently. Now that 70 per cent of Europeans and more than 50 per cent of North Americans own such phones, those forecasts have been reduced sharply.
But Merrill says perhaps the reductions went too far.
For one thing, new technology, such as picture capability, will help drive existing phone users to upgrade at a rate faster than anyone else has calculated. And Merrill believes that even as the industry -- and analysts -- became overly optimistic about the rate of phone sales back in 2000, now forecasts are overly gloomy, suggesting far worse than will materialize.
The biggest market for replacement phone sales will be in Europe, Merrill's analysts say, where adoption of new technologies will push the upgrade cycle along. And in new colour-screen and built-in-camera technologies, Nokia has a commanding share. It also has new products due out in the next few months that could drive its market share even higher.
Adding up all these positive factors, Merrill predicts Nokia's profit estimates could go up by 40 per cent next year from their previous targets. Will Nokia agree, and raise forecasts on Wednesday?
What makes this so interesting for investors is that if Merrill forecasters are right, they are virtually alone. The expectations of other analysts are much closer to the previous, lower forecasts for growth.
But why shouldn't Nokia have a better view of its own industry than does a research firm?
For one thing, the company is conservative. Good thing, too; unlike most cellphone firms, it is still profitable, and even in its infrastructure business it is able to maintain positive cash flow in the face of a devastated market. Still, when the phone giant spoke to analysts last week, it said its sales growth in its mobile business would be 10 per cent next year, not the 15 per cent it had implied earlier.
It also warned that its infrastructure business would continue to suffer.
Therein lies the opportunity.
Merrill gets a particular view of the business that Nokia might not -- a high-level look not only at consumer trends but also at Nokia's rivals. And its analysts know Nokia well enough to look past certain characteristics of management, including prudence. As Nokia chief executive officer Jorma Ollila told reporters last week, the company believes that the uncertainty in the global economy and the possibility of war in Iraq means that a 10-per-cent forecast makes sense. It's a base, in other words.
Although the wireless equipment business is in a dismal state, with sales to telecom firms dropping quarter after quarter, that can't continue. Usage is still growing -- one estimate is by 50 per cent a month -- so, at some point, network buildout will have to resume. Meanwhile, many analysts suggest Nokia might stand to benefit in a survival-of-the-fittest scenario.
There is another bonus for investors in addition to the opportunity to buy into an industry ahead of an inflection point, where weakness turns into strength. It's the opportunity to buy shares in a company run by prudent managers. No other kind deserves the investing dollars.
Amanda Lang is the host of AM Business on Report on Business Television and CTV. <<
- Eric - |
