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Nokia rebound refuels its stock
Earlier this year, the company that once looked unstoppable stumbled. But its market share is climbing again, and new phones should help the company build on its gains.
By Robert Walberg
The worlds largest maker of cell phones, aka Nokia (NOK, news, msgs), is making a comeback.
The Finland-based cell phone maker's market share is climbing again, and it's set to introduce a host of new models, which could add to those gains. Top management is talking optimistically about better earnings next year.
The stock is up 48% since hitting its bottom for the year on Aug. 12, and it could have more juice in it as the turnaround continues.
But there's a little more static in the longer-term outlook because the company faces several difficult challenges. These include:- Intense competition from companies like the newly revitalized Motorola (MOT, news, msgs).
- Market saturation.
- Delays in the rollout of 3G, the third generation of wireless technology that has more capacity than earlier versions.
Still, it's clear that Nokia has learned from its recent mistakes. It was slow to recognize the appeal of clamshell and camera phones. The error resulted in its share of the cell-phone market plunging to 29% in the second quarter of 2004 from more than 37% in the fourth quarter of 2003.
To its credit, the company responded, quickly cutting prices and updating its product line. And, according to its figures, it has started to win back market share. Nokia put its third-quarter market share at 32.5%. Strategy Analytics, a Boston, Ma.-based research firm, puts the number closer to 31%. While either figure is well below the 34% share the company enjoyed in the third quarter a year ago, the trend is moving in the right direction again.
Adding music
In order to build on its recent momentum, the company announced that it will introduce 40 new handsets next year, up from the 35 unveiled this year. More importantly, nearly two-thirds of those will be camera phones, while about half will be of the clamshell variety. Trying to anticipate rather than follow demand, the company also noted that MP3 players would be included in nearly half its products.
Offering a richer, broader array of features is only one way Nokia hopes to win back market share. The company also is trying to be more responsive to vendor requests for special features. Its past reputation of being uncooperative in such situations opened the door for its more aggressive competitors, especially Samsung and LG Electronics, to steal market share.
Nokia is targeting the market's very high end, the segment thats growing the fastest. This means it'll also make a bigger push into the so-called smart phone market. A smart phone is a cross between a phone and a personal digital assistant, or PDA. The market is currently dominated by Research In Motions (RIMM, news, msgs) Blackberry and palmOnes (PLMO, news, msgs) Treo.
With Nokias resources and brand appeal, theres good reason to think that the company will succeed in capturing a sizeable share of this market. In the third quarter, global shipments of smart phones nearly tripled compared with the year-earlier period to 4.5 million units, according to Canalys.com, a British research company.
While Nokia believes that it's well into its turnaround, the company still faces those big hurdles:
Motorola's return and growing competition. First and foremost is the intense competition both at the mid and high end. Korean cell phone makers Samsung and LG Electronics have been gobbling up share with a handsome array of competitively priced products. Meanwhile, Motorola is also fighting to gain share and build on its No. 2 position. Its new designs have recently been winning favor with customers, though performance is still a bit of a problem.
High-end market: Great opportunity but significant brand loyalty. At the high end, the outlook is promising, but Nokia has yet to win significant converts from customers showing brand loyalty to Research In Motion and palmOne, the first in the market. While this end of the market is the fastest growing, it's still a small piece of the overall cell-phone market. So even if Nokia succeeds, the effect on its bottom line wont be significant, at least not yet.
Market saturation: Too many phones? Handset sales are expected to grow 8% to 10% in 2005, down considerably from the 25% growth seen in 2004. There are two causes for the decline: - The slower-than-expected 3G rollout.
- By next year, most customers will already have traded up to color screens from monochrome.
Naturally, if growth slows, manufacturers will cut prices to gain share, and that's likely to push down profit margins throughout the industry. If Nokia is serious about trying to push its share to 40%, then its margins are almost certain to come down, raising a question of how much the company should "pay" for market share.
Betting on 3G
Even with these challenges, investors have to be encouraged by the companys efforts to win back market share through product enhancements and improved vendor relations. As the 3G rollout gains momentum in late 2005, Nokia, with its strong presence in Europe, is well positioned to benefit.
The company also has another strong point -- cash. With nearly $15 billion in cash and little debt, Nokia has the resources to meet any challenger head on. While having the resources doesnt guarantee success, it does put the company in the game across the board, and thats a big competitive advantage.
Nokia's cash position also makes the stock a compelling value even after the big run-up over the past few months. Backing out the cash of nearly $3 per share, the stock sells at 14.6 times estimated earnings of 89 cents for 2005. Thats below the industry average and the market multiple, rare for a sector leader.
As long as the company can hit its sales and earnings targets, the stock -- now priced around $16.30 -- should have little trouble rising to fill its April 5th/6th gap at $20.82. For those unfamiliar with the term, a downside gap occurs when a stock opens lower than the previous days low. Later, that price gap will act as resistance if the stock tries to stage a recovery.
In Nokias case, a move back to the ceiling set last April and to more historical valuation levels would represent a nice 30% jump -- with a 2.2% dividend to boot.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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