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PLAYING THE CELLULAR BOOM: NOKIA VS. ERICSSONShares of Finnish telecommunications equipment maker Nokia (NOK.A) have already rocketed up more than 130% this year. But as a long-term play in the booming market for cellular phones, Nokia is still a good choice. After all, there aren't that many companies to choose from. And Nokia is "Hitting Its Stride," as the title of a July 29 report from Goldman, Sachs & Co. proclaims. Nokia's American depository receipts (ADR) rose 5%, to 90 on July 30 in trading on the New York Stock Exchange, thanks in part to Goldman's glowing report. It cites "exceptional" demand for Nokia's cellular phones, strong growth in its infrastructure business (cellular base stations), and a healthy cash position that will fund research to keep the company at the forefront of new technologies. On July 24, Nokia posted second-quarter earnings of 70 cents per share -- 13 cents above Wall Street's expectations. Operating profit for the second quarter grew 75%, and sales were up 41% from the year before. "We see Nokia rising further in the ranks of leading telecom equipment suppliers," wrote Goldman analysts Richard Kramer and Ajay Diwan. Thanks to this year's runup, however, Nokia isn't cheap. Kramer and Diwan expect the company to post long-term earnings growth of 26% a year, which is below Nokia's p-e of 29 times their 1999 earnings estimates. (Growth stocks are often considered overvalued when they are selling at a multiple that exceeds projected earnings growth.) Goldman figures that Nokia is inexpensive compared with other telecom equipment makers, such as Lucent Technologies (LU) and Tellabs (TLAB), which have '99 p-e's of 48 and 39 respectively. To trade at valuations equal to those of such companies, Nokia's stock price could rise another 15% over the next 12 months, Goldman predicts. Merrill Lynch analysts weren't quite as generous on the valuation question in a July 28 report. They put Nokia's prospective price-earnings multiple at 30 and long-term earnings growth at only 17.5% (in part because of concerns about Asia). "We feel that the good news is already in the price, and whilst we regard the stock as an excellent long-term holding in any growth portfolio, we would not chase the stock aggressively at these levels," wrote Anita Farrell and Neil Barton for Merrill Lynch & Co. Assuming that makes sense, where do you place your bets if you want to play in the cellular boom? "A wireless revolution is taking over this world," says Oscar Castro, a senior portfolio manager who specializes in communications stocks at Montgomery Asset Management. And while many companies are selling wireless services, only a handful are selling equipment. "Go ahead and buy them all," Castro urges, citing top cellular companies such as Nokia, Ericsson (ERICY), and Philips Electronics (PHG). In Castro's case, "all" doesn't include Motorola (MOT), which he avoids because of its inability to compete on infrastructure sales. Castro is currently adding to his Ericsson stake and cutting back on Nokia, which had grown to one of the largest holdings in Montgomery International Growth Fund. When Nokia traded at a discount to Ericsson, Castro owned more Nokia. But now that Ericsson is the underdog, he is shifting the equation. In contrast to Nokia's stellar recent earnings release, Ericsson's July 27 report disappointed the Street. Its operating and net earnings slightly exceeded expectations, but it reported weaker-than-expected mobile-phone sales. Ericsson's shares closed down 13% that day, though the stock is still up more than 50% year-to-date. Nokia's current strength is based largely on sales of its 6110 phone series, which is in huge demand thanks to its long battery life, small size, and voice quality. Given that Nokia's mobile-phone sales were up 50% in the past quarter, it's hardly surprising that Ericsson's sales growth wasn't as strong, says Castro. But Ericsson is hardly marking time. When Ericsson comes out with its latest phones, "then the story will be reversed," says Castro. The Goldman Sachs analysts, meanwhile, are sticking to their position: They expect Nokia to have some high-profile new-model introductions of its own in the third quarter of this year, which "should only further raise Nokia's profile as the most innovative of the mobile-handset producers in terms of design and product functionality." So if the cell-phone business is your investment of choice, you may have staked out a good spot: Nokia and Ericsson are both great companies at the forefront of a growing market. If you can't decide between the two, do what Castro recommends: Buy 'em both.
By Amey Stone, Associate Editor, Business Week Online RELATED ITEMS
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Updated July 30, 1998 by bwwebmaster
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