A QUARTER-INCH HAS HELPED TURN THE shares of Nokia, the world's largest cellphone makel; from a highflier into some thing resembling a value stock.
That's the difference in thickness be tween Nokia's chunky 8800, one of its slim mer phones, and the ultra-svelte Slvr from Motorola (ticker: MOT), the world's sec ond-largest cellphone manufacturer.
Investors, worried that Nokia's clunki ness can't withstand Moto's stylishness, are valuing the Finnish giant way below Moto, assigning its stock a multiple of 13 times· next year's expected per-share profits-below both Motorola's and the S&P 500's 15.
Both Nokia and Motorola shares were battered last week after the two handset makers disappointed investors by reporting a third-quarter drop in earnings. But the company with the most cutting-edge phones lnight not have the most upside.
For four years, Nokia (NOK) repeatedly has lnissed the latest trends in cellphone designs-first clamshells, now thinness. Nonetheless, it has hung on to its dominant 36% global phone-market share.
By sidestepping the costly battle to cre ate the hippest mobile handset, and instead cutting prices in Asia, a boolning market,Nokia has kept operating profit in its mo bile-phone division higher than Moto's-but not as high as inwstors would like. In the third quarter, unit sales were up 33%, to $88.5 lnillion, but net profit slid 4%, to $1.065 billion.
Still, Nokia's long-term financial outlook is brighter. Next year the company's net is expected to rise about 18%, versus 15% at Motorola, according to Thomson Finan ciallBaseline's survey of Street forecasts.
Moto's thin phones didn't help the com pany's profitability in the third quarter, when it sold 54 million units, 39% above the year-earlier level but below some analysts' expectations. That boosted its global mar ket share a bit, to 22.4% But its profits-down 45% to 39 cents a share-fared far worse than Nokia's.
''What's important to shareholders is having a reasonable operating profit, and that's what Nokia has focused on," says Albert Lin, who follows both Motorola and Nokia for American Technology Research in San Francisco. He has a Buy rating on Nokia and thinks it could hit $25 (more than 25% above recent levels) over the neA-t 12 months. He rates Motorola a Hold.
Concerns about Nokia haven't changed much since Barrons wrote bullishly about the company last November.
To be sure, Nokia's profit on each de \ice. on average, has slipped, and investors worry that without the latest cutting~edge phones, the Finnish concern is being forced to slash prices to hold share against Motorola and third-place Samsung Elec tronics (SSNLF.PK),
Nokia is indeed the low-price leader in phones, with an average price of $117 ver sus $131 for Motorola and $154 for Sam sung, according to analysts.
But it's not as simple as all that. The battle to produce the slickest phone isn't helping Samsung and Moto's profits, nor is it slowing Nokia's terribly. Motorola is sell ing its new KRZR in the U.S. at a price (before subsidies from the carriers) of $425-$75 less than the company had ex pected, says AmTech's Lin.
And Samsung is selling its ultrathin X820 at a loss of $10 to $20 per unit, after the cost of shipping and servicing the phone, estimates Lin.
Moto's personal~phone unit has an oper ating profit in the 11% to 12% range as it spends R&D money to spin the snazziest phones; Nokia's operating profit was 15% in the third quarter.
Nokia is trying to make up in volume what it gives up on some low-cost phones.
Phones with an average price under $63 represented more than 40% of Nokia's sales in the second quarter. They helped the Eu ropean manufacturer increase its share of China's cell phone market by a couple of per centage points, to 35%, in the third quarter, wrote Piper Jaffray analyst T. Michael Walkley in a note to clients on Sept. 27.
Meanwhile, Nokia is taking steps to trim operating costs even fm'ther. It has built five new manufactming facilities around the world in the past few years, allowing it to secure better deals for its products with shipping firms, says Lin.
Nokia's chief executive, Olli-Pekka Kallas vuo, says his company will cut more operat ing costs as it winds down agreements to use technology from chip maker Qualcomm (QCOM), which owns rights to patents on next-generation cellular transmission.
That could hurt Nokia in the U.S., where Qualcomm's technology is heavily deployed by the Verizon Wireless venture ofVerizon Communications (VZ) and by Sprint (S), the NO.2 and NO.3 cellular operators. But Nokia's payoff in Asia could be a lot more important, as increasingly affluent consum ers there grow up with the brand. "There's a middle class of 200 million people in China that is frankly a much bigger opportunity than the entire U.S. population of 300 mil lion," says Ittai Kidron, the Nokia watcher at CIBC World Markets. Kidron nonethe less thinks Nokia generally will trade with the market until it comes up with slimmer phones.
Despite the threats from Moto and Sam sung, and fifth-place Sony-Ericsson, Nokia's valuation is out of whack with the most con servative expectations. Cut Nokia's earnings growth rate by more than half, to 8%, and give the company a forward PIE multiple of 15-the same as the S&P's-and the shares should still be worth at least $21. They closed Thursday at $19.35, off 2.62%.
The dip in Nokia could be short-lived. The company dominates its industry, has shown an ability to withstand shifts in fashion and is positioned for growth in many ofthe world's fastest-growing and largest markets, includ ing China and India. Eventually, Nokia inves tors will ring up nice gains._
