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Nokia No Bargain

Posted: Apr 18, 2008 14:34 PM by Ben McClure

Tickers in this Article: SNE, ERIC, MOT, NOK

You've heard it before: "Invest in a company's future, not in its past." In the case of Nokia (NYSE:NOK) the market has rightly taken the recommendation to heart. On Thursday April 17, the telecom equipment titan reported hefty sales and profit gains for the first quarter. Yet, the market's response was to knock a whopping 14% off Nokia's share value. The reason: a gloomy outlook for the year ahead.

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Nokia's Past
First quarter results came in at the bottom end of analysts' estimates. Nonetheless, the numbers were impressive. Sales swelled 28% to 12.7 billion euros compared to last year's Q1, and operating profits jumped 20% to 1.5 billion euros. What's more, Nokia still holds its dominant 40% market share in the handset space, more than its biggest rivals, Motorola (NYSE:MOT), Samsung and the Sony-Ericsson (NYSE:SNE, Nasdaq:ERIC) handset joint venture.

Based on those numbers, investors might think now is time to snap up a few Nokia shares while they are down. But there is good reason to think twice before hitting the buy button.

Nokia's Future
The trouble is that next year's sales prospects are downright dismal. In its Q1 earnings release, Nokia drew attention to "the negative impact of the recently weakened dollar, a slowing US economy, and possibly going forward some economic slowdown in Europe." Nokia estimates only slight growth in the overall global telecom systems market in the coming quarters. That's the last thing that any investor wants to hear.

The outlook gives little reason to hope for more upside from Nokia. Competition remains high in Europe, Nokia's largest market. Over half its sales get paid in weakening U.S. dollars or closely pegged currencies. If that wasn't enough reason to worry, the average price of Nokia handsets is slipping. For Nokia's that's now 79 euros versus 84 euros in the previous quarter, a reflection of Motorola's desperate price war and also slowing demand. Pricing pressure will put a damper on revenue growth and make it awfully difficult for Nokia to prop up those hefty profit margins that shareholders have grown to expect.

A Giant Sell for the Cell Giant?
Without a major growth catalyst Nokia might be hard-pressed to keep the share price above $30. Friday's price of about $29 on the New York Stock Exchange gives Nokia a forward price-to-earnings multiple of just over 16. With growth and margins possibly at a peak, and a dwindling industry in need of new products, Nokia might look good now but not in the future.

For further reading on gloomy outlooks, see Can Earnings Guidance Accurately Predict The Future?

By Ben McClure

Ben McClure is director of McClure & Co., an independent research consultancy. Before founding McClure & Co., Ben was a highly-rated European equities analyst at London-based Old Mutual Securities. He also spent several years as a business/technology journalist at the Economist Group. McClure graduated from the University of Alberta School of Business with an MBA.

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