Why Ericsson Rose and Nokia Fell
By Tero Kuittinen
Special to TheStreet.com
1/29/99 3:48 PM ET
Ericsson (ERICY:Nasdaq ADR) and Nokia (NOKA:NYSE ADR) shares have been
volatile following this week's back-to-back earnings reports from the top two
manufacturers of digital mobile phones.
Ericsson delivered results that were mostly in line with expectations. As I
predicted earlier, mobile phone sales contracted 3%, against predictions of a
slight sales increase. This was somewhat balanced by an increase in mobile
infrastructure sales of 20%. While that still trails the industry average, the number
was 2 points higher than the consensus estimate.
But Ericsson's shares gave me a nasty surprise, by taking off like a rocket after
the announcement. Why? The trigger was the introduction of a new phone called
T28. It finally represents a clear technological leap for Ericsson, with both
voice-activated dialing and graphic display packed into less than 100 grams.
The result: A relief rally for Ericsson, largely in spite of the actual fourth-quarter
results rather than because of them. But there's a definite downside to the T28
launch: Ericsson cannot deliver the product in volume until "mid-year" -- an
ominously vague phrasing. It was widely expected that Ericsson can start selling
the new phones in March, so this piece of bad news is currently being ignored by
the optimists.
An analyst in Stockholm tells me the company felt pressured by the market into
debuting the phone ahead of schedule.
No matter how positively the product is currently viewed, what matters is when
Ericsson can start selling it in volume. With the company's phone sales alreading
in decline during the fourth quarter, the pressure on Ericsson during the next two
quarters before T28 arrives will be intense.
Ericsson seemed to acknowledge this by warning that the first-half results for this
year will be below the 1998 results. The lack of a new phone platform in the first
half will damage the company's profitability this year. I expect the markets to start
evaluating this prospect after the current relief rally is over.
Oy! Nokia
In contrast to Ericsson, Nokia delivered numbers above the consensus estimate --
but not as much as I expected . The consensus EPS prediction was $1.05 and
the actual result was $1.17. Phone sales grew by 114% -- the mobile network
sales increased by 31%. But as good as the figures are, they do not represent
the kind of knock-out that was needed to stave off profit-taking.
Once again, the biggest factor here is not the actual numbers, but the emphasis
on 1999 prospects. And here Nokia's decision of not to tip its hand on new phone
models is depriving Wall Street of the rush of instant gratification that Ericsson
provided. After Ericsson announced the T28, Nokia's share price dropped sharply
-- only to end Thursday up 6% in New York. I expect the volatility to continue as
the feverish guessing game on Nokia's new models continues -- Nokia's stock
price has fluctuated by $15 in Helsinki on Friday.
What Does It All Mean?
One view on Nokia's stubborn silence in Europe is that the company can afford to
keep mum on its future products, while both Ericsson and Motorola have been
forced by nervous investors to elaborate on their summer line-up. According to
this school of thought, Ericsson's decision to unveil a phone that is still perhaps
five months from shipping in volume is a sign of weakness -- the announcement
creates a share price surge that discounts good news that are well in the future.
Nokia's current share price is mostly influenced by the lack of new product
information. Profit-taking generated by a steep preannouncement rally and worries
on China's possible devaluation are increasing the nervousness. Nokia has the
most to lose if China tips into a period of economic unrest -- but it also has the
most to gain if China can keep it together. It's the kind of factor that you have to
weigh with this company.
At the current levels, Nokia represents an attractive opportunity -- the new
products are not yet discounted, and profit-taking is taking the edge off recent
gains. The company often announces products just two to three months in
advance of launching them, so March is most often targeted as the most likely
period for the bulk of Nokia's product introductions.
The decision to not boost the stock price today by hyping future products is
typically Finnish -- practical, blunt and probably vexing to international
shareholders. I think Ericsson will face a dip in the near future as the grim
prospects of the next two quarters are weighed against the benfits the company
will derive from new models in autumn. Long term, the shares look compelling, but
the likelihood of a spring correction remains high.
A graduate student at the University of Helsinki, Kuittenen has written on the
trends and issues in mobile-telecom stocks for two years. At the time of
publication, he held shares in Nokia, though positions may change at any time.
While he cannot give any investing advice, he welcomes your comments at
tpkuitti@Operoni.helsinki.fi.
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