Technology

Is Nokia's Battery Recharged?


By Andy Reinhardt Given the epic suffering endured during the telecom meltdown from 2000 to 2002, the past year doesn't quite qualify as an annus horribilis for Nokia (NOK). But 2004 was nonetheless extremely difficult and disappointing for the world's largest communications-equipment company.

Coming off a record fourth quarter in 2003, the Finnish giant suffered embarrassing weakness in its handset portfolio during 2004's first half that throttled growth and cost it significant market share. Equally distressing, Nokia lost the faith of investors who had participated in the stock's rocket-ship ride over the past decade.

MISSING AN OPPORTUNITY? From a high of $23 on Mar. 7, Nokia's shares plunged more than 50% on the New York Stock Exchange, to a low of $11 on Aug. 13, after two consecutive quarters of disappointing results. The shares have since recovered to nearly $16, but Nokia is still down 7% for the year. By comparison, archrival Motorola (MOT), under the leadership of new CEO Ed Zander, saw its shares soar 38% in 2004.

Clearly, Nokia is no longer the Wall Street darling it once was. Uncertainty over its product portfolio and profits are prompting analysts to reduce their ratings. Once a must-have growth stock, Nokia is now rated a hold by a majority of analysts.

But they may be missing an opportunity. Nokia is already in the process of recovering from its stumble. It still has some convincing to do to win back its growth-stock status. But for long-term investors, this proving ground could be a very smart time to jump back into the shares.

REGAINING MARKET SHARE. For starters, Nokia, still the No. 1 maker of mobile-phone handsets, is cheaper than many of its rivals. It trades at a trailing 12-month price-earnings ratio of just 17, compared to 31 for Motorola and 31 for the overall communications-equipment industry -- which also includes businesses such as Cisco Systems (CSCO), Qualcomm (QCOM), Ericsson (ERICY), Alcatel (ALA), and Lucent (LU).

Even Nokia's skeptical stock analysts, including Jari Honko, with Helsinki-based brokerage EQbank, think the shares are worth considering long term. Honko rates Nokia a near-term reduce, but a long-term buy. Wall Street's consensus calls for Nokia shares to rise 14% in the next 6 to 12 months.

Most important for long-term investors: Nokia management isn't sitting idly by as market share dwindles. Shocked by the severity of its market-share loss -- it had nearly 35% of the global handset sector at the end of 2003, but only 29% by 2004's first quarter, according to market researcher Gartner -- the outfit cut prices and sped up the release of midrange handsets. Thanks to such moves, Nokia has already clawed back to a 31% market share.

MULTIMEDIA PUSH. With hit phone models like the 6230, 6600, and 7610, it's likely to show additional market-share gains for the fourth quarter. Nokia's biggest change in direction was to roll out a handful of "clamshell," or flip phones -- a design the Finnish giant had earlier avoided but that's gaining increasing popularity with consumers. "Nokia is heading in the right direction," says Honko.

Under the guidance of CEO Jorma Ollila, Nokia has embarked on an ambitious reorganization to target emerging opportunities in multimedia devices -- camera phones, pocket-size game machines, digital music players, and the like. For business users, it's delivering a line of hybrid devices that combine features of cell phones with handheld computers.

Validating the strategy, Nokia's multimedia and enterprise divisions have shown the fastest growth in recent quarters. The mobile networking-equipment division, recovering from the post-bubble telecom slump, has also surged in 2004.

MATURE OUTFIT? At the same time as it's fighting for share, Nokia is also pushing like mad to expand the overall cell-phone market, especially in the developing world. Executives acknowledge that the low end of the mobile-phone industry is becoming a commodity business, but they argue that Nokia's vast economies of scale allow it to compete with low-cost manufacturers in Asia.

According to CCID Consulting, Western companies such as Nokia and Motorola have gained market share in China, while local handset makers' collective share of the country's domestic market fell from 50% at the start of the year to just 38% by June. Nokia's surging sales in the so-called BRIC countries -- Brazil, Russia, India, and China -- have encouraged its executives to accelerate by a year, to 2006, their estimate for when the global installed base of mobile users will top 2 billion.

Still, the nagging fear among investors is that Nokia's market share and profit margins may never return to the glory day levels. As a result of price cuts and increased marketing costs, net margins fell from 11.7% in the first nine months of 2003 to 10.8% in the same period this year. That translates into $321 million less profit, with revenues down $628 million. "Investors see it as a mature company, not a growth company," says EQbank's Honko.

POTENTIAL TO SURPRISE. Analyst Richard Windsor of Nomura Securities in London figures the cell-phone maker will finish 2004 with revenues of $39 billion, down 2.7% from last year, due in part to the weak U.S. dollar. He projects that net profits will decline over the next three years, from 10.7% of revenues this year to just 6.5% in 2007.

No doubt, Nokia squandered opportunities in 2004 -- a year when mobile-phone sales climbed 25%, to 652 million units, according to Lehman Brothers estimates. But that doesn't mean it's not a growth outfit anymore. With handset sales set to top 750 million by 2006, Nokia could surprise to the upside if its product pipeline remains strong and it continues to regain lost market share.

Nokia's stock may no longer look like the surefire grower it once did. But one thing is certain: Never write off the Nordic giant, whose pragmatic leadership turned it from an obscure maker of rubber boots, cables, and TVs into the world's largest communications-equipment maker. Nokia was down in 2004, but it's far from out of the game. Reinhardt a senior correspondent in BusinessWeek's Paris bureau


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