Market Reaction: Nokia and Moto Sequential ASP Declines
Q2 2006 ASP¹ Q3 2006 ASP² QoQ Decline
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Nokia €102 ($128 USD) €93 ($118 USD) -$10 (-7.8%)
Motorola $138 USD (€110) $131 USD (€104) -$7 (-5.1%)
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¹ Currency conversion on 6/30/2006 at Interbank rate
² Currency conversion on 9/29/2006 at Interbank rate
Both MOT and NOK, who together had almost 56% global share³ in Q3 2006 -- up from 51% in Q3 2005 -- survived Q3 Earnings market reaction reasonably well despite reporting large ASP declines which resulted in sequentially lower revenue sales in the Moto case (offset by operating margin gains) on record unit handset sales. Nokia reported sequentially higher revenue and gained market share QoQ and YoY while increasing the share gap with number 2 Motorola on record unit handset sales but sacrificed gross margins and operating margins in the process.
³ Nokia: 34.5% per Strategy Analytics [+ 2.8 ppt YoY]; 34.7% per IDC [+ 3.1 ppt YoY]
__ Moto: 21.0% per Strategy Analytics [+ 2.6 ppt YoY]; 21.1% per IDC [+ 2.7 ppt YoY]
Losers in the share game YoY to Nokia, Motorola, and Sony Ericsson, were Samsung [-0.6 ppt YoY], LG, [-1.0 ppt YoY], BenQ and other 'Others' [- 5.0 ppt YoY] according to Strategy Analytics.
Despite being treated to a share price trim (rather than a haircut) last week and while both NOK and MOT have underperformed the S&P on a CYTD basis through Friday's close, both have performed reasonably well on a 12 and/or 24 month basis relative to the S&P ...
Time Period NOK MOT S&P 500
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52 Week High $23.46 $26.30
52 Week Low $16.02 $18.66
Friday NYSE Close $19.39 $23.64
Prior Friday Close $19.88 $26.20
CY'06 Year to Date +5.96% +4.52% +9.64%
One Year +21.95% +13.02% +16.20%
Two Years +29.96% +54.31% +24.01%
NOK lost only 2.5% share value last week while MOT lost 9.7% but there was more pre-earnings uncertainty built into Nokia's results than Motorola's and it had already declined from it's April 21 52 week high due to positive MOT sentiment. NOK is down $4.07 (17.3%) off its 52 week high, while MOT is only down $2.66 (10.1%). I don't expect a sharp turnaround in either stock but my personal opinion is that in CQ4 both NOK and MOT will creep back towards their 52 week highs, but results from TI today and QUALCOMM on November 2 will likely color wireless sector sentiment. Hopefully the earnings and guidance of both are viewed positively.
The article clipped below discusses Nokia's and Motorola's sequential ASP declines and market reaction to their consequences reasonably intelligently ...
>> Nokia, Motorola's Price Declines Don't Faze Wall Street
Roger Cheng
Marketwatch (New York)
October 20, 2006
tinyurl.com
When Nokia Corp. (NOK) and Motorola Inc. (MOT) reported third-quarter results earlier this week, investors were disheartened by the drop in operating margins and the average selling prices for their handsets.
Those looking for any drastic improvement will have to be patient. As the world's two largest cellular phone makers duel in the rapidly growing emerging markets, the low-end devices they are pushing in those regions will continue to weigh on average selling price. But the importance of those markets towards future growth have investors willing to cut them some slack.
"You better be established there if you want hope of selling more phones," said Albert Lin, an analyst at American Technology Research. "For now, they're paying the price."
Many feel the two remain attractively valued, and neither company was punished too severely for their missteps. Motorola fell 5% following the news, but at $23.31, it remains close to its 52-week high of $26.30 set last week. Nokia had a gentler decline, falling 2.6%. It recently rose 0.5% to $19.44.
When stacked against each other, Motorola holds a premium over Nokia. Motorola trades at 15 times 2007 earnings estimate, while Nokia has a price-to-earnings multiple of 13. Wall Street analysts are generally bullish on both companies, with 18 of the 26 analysts covering Nokia holding a buy rating on the company, and 29 of the 35 analysts covering Motorola carrying a positive rating.
Nokia, with an estimated global market share of 37% [?], is the clear leader in the industry, according to Lin. "We think, as far as the differential in premium, Nokia is a better stock deal," he said. "From an investor standpoint, it would be hard to own Motorola if you didn't own Nokia first."
Jefferies & Co. analyst Bill Choi, however, argues that Motorola's premium over Nokia is warranted because it has more room to grow. "Nokia already has a leading share, so it's not a growth story," he said. The analyst doesn't own a stake in Motorola, but his firm advised the company on its acquisition of Broadbus Technologies.
A Tough Market
Early Thursday, Nokia reported that average prices for its phones had fallen to EUR93 ($117.12) from EUR102 ($128.46). It blamed the increase proportion of cheaper phones in emerging markets.
Motorola, meanwhile, reported late Tuesday that its average selling price fell as a result of disappointing sales of its Sprint Nextel Corp. (S) Nextel iDEN phones, a price cut in the popular Razr, and a doubling of the market share in India.
"When you look at the total market value, (average selling prices) have been coming down," Choi said. "Overall, the handset market is tough to make money in."
He noted, however, that handset makers with little presence in the emerging markets, such as Sony Ericsson, a joint venture between Sony Corp. (SNE) and L.M. Ericsson Telephone Co. (ERIC), and Samsung Electronics Co. Ltd., had stronger margins.
Nokia expects to stabilize its operating margins even as it increases its presence in the emerging markets. Lin said that the company has done a good job in maintaining pricing power in its higher end handsets and smartphones.
Lin believes Nokia has the edge in margins. "Overall, you can't ignore the fact that Nokia's forward operating margins were in 15.3% range, and MOT was 11.9%," he said. "That's a lot of margin difference."
The analyst has no conflicts of interest to report.
Motorola, meanwhile, believes both prices and margins will rise as it prepares a slate of high-end phones for the holidays. "During the fourth quarter, we expect ASPs to improve as a steady stream of new products joins Krzr in the market," said Motorola Chairman and Chief Executive Ed Zander during a Tuesday conference call.
Analysts have expressed concern that Motorola will have difficulty charging high prices for its new phones because they look similar to the Razr, which has essentially become a mass-market phone. In addition, Verizon Wireless, a joint venture between Verizon Communications (VZ) and Vodafone Group PLC (VOD), cut the price of Motorola's smartphone, Q, to $100 from $200 with a two-year contract.
But the company should eke out additional cost savings and higher margins by manufacturing the phones under one streamlined process, a focus of Zander's since he took over in 2004. That will also help improve the profitability of its low-end Motofone, which it will push later this year. ###
- Eric - |
