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What's next for wireless?
Motorola's cell phone news was good on the surface, but Nokia looks like a better bet.
January 23, 2003: 6:41 AM EST
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Seems like Santa Claus left many a cell phone under the Christmas tree. But will that be enough to spur a recovery in wireless equipment stocks for the rest of 2003?

Motorola, the No. 2 maker of wireless handsets, announced strong sales from its mobile phone division in the fourth quarter, news that seems to bode well for Qualcomm, which makes chipsets for cell phones, although rival Nokia somewhat dampened the mood Thursday.

Nokia said it expected to reach pro forma earnings of 0.15 to 0.19 per share in the seasonally weak first-quarter, compared with 0.19 a year ago. Nokia did not give a precise forecast for sales, but said it expected net sales growth for the group to be lower than the zero-to-nine percent growth estimated for the handset unit, which is Nokia's main business. Last year it had sales of 7.01 billion.

In addition, the No. 1 wireless firm posted a pro forma profit of 0.26 in the fourth-quarter, above the 0.23 to 0.25 target it set in December and better than the average estimate in a poll of analysts. It earned 0.24 a share in the fourth quarter of 2001. Nokia's sales came at the low end of the company's forecast, up one percent to 8.84 billion euros year-on-year.

Qualcomm reported better-than-expected fiscal first-quarter earnings Wednesday afternoon of 42 cents a share, an 83 percent increase from a year ago. According to First Call, analysts were expecting Qualcomm to post earnings of 37 cents. The company also posted $1.1 billion in sales, a 54 percent gain from last year and higher than analysts estimates of $1 billion.

Motorola margins under pressure

Of course, the 2003 outlook is more important than what happened in the fourth quarter. To that end, Motorola announced Wednesday morning that total shipments of cell phones for the industry may increase by as much as 10 percent in 2003.

But Motorola (MOT: down $0.22 to $8.53, Research, Estimates) might not be the best beneficiary of this growth. Greg Teets, an analyst with investment bank A.G. Edwards, notes that much of Motorola's handset growth in the fourth quarter came from lower-priced cell phones and that these units have lower profit margins than the higher-end models.

Wireless war
Nokia looks like the stronger play on a recovery in cell phone sales.
Company % of sales from handsets Handset operating margins P/E* 
Motorola 44% 9% 23 
Nokia 78% 22% 17 
 * based on 2003 earnings estimates
 Source:  Company reports, First Call

Although operating margin for Motorola's cell phone division of 9 percent was higher than the 7 percent recorded a year ago, Teets says that if the trend toward lower-priced phones continues, it will be tough for Motorola's margins to improve.

Nokia, on the other hand, has been able to consistently eke out higher margins on cheaper phones, he says. Operating margins for Nokia's mobile phone unit in the third quarter were 22 percent. Teets owns shares of Nokia and his firm does not have an investment banking relationship with either Motorola or Nokia.

Another worrisome sign is that despite strong sales, Motorola's orders for handsets were down 3 percent from a year ago. The company said that this was a reflection of reduced backlog by customers. But Sandy Sanders, an analyst with Evergreen Investments, is not so sure. Sanders thinks that Motorola flooded the market with cheaper models and that this created an excess in inventory, which would hurt future sales.

For that reason, Sanders says Nokia (NOK: up $0.03 to $14.94, Research, Estimates) is in a better position to profit from a possible industry upturn in 2003. "Nokia is a much more efficient manufacturer than Motorola," said Sanders. "Both are positioned well from a product standpoint but Nokia's supply chain looks better." The Evergreen Technology fund owns shares of Nokia but not Motorola.

Another positive for Nokia, but less so for Motorola, was news Wednesday from Carphone Warehouse, Europe's largest retailer of wireless handsets. The company announced better-than-expected results for its latest quarter and alleviated concerns about a slowdown by reaffirming profit targets for the year. Nokia is a much stronger presence in Europe than Motorola, says Teets.

Nokia is also more leveraged to a recovery in the handset market since mobile phone sales accounted for 78 percent of its total revenue in the third quarter. For Motorola, handsets made up 44 percent of sales in the fourth quarter.

Qualcomm looking pricey

Sanders also owns a small amount of Qualcomm in the Evergreen Technology fund, but he says he's concerned about what effect Motorola's channel stuffing will have on the company going forward.

Qualcomm (QCOM: down $0.27 to $36.69, Research, Estimates) produces chips based on the code division multiple access (CDMA) standard. Verizon Wireless is one of the bigger customers for CDMA-based phones and these phones were among the more popular Motorola sellers in the fourth quarter, Sanders says.

As a result, he thinks Qualcomm's guidance might not be as optimistic as it has been in previous quarters and that could impact the stock, which has soared more than 32 percent since the market's Oct. 9 low point. Qualcomm did raise earnings estimates for its next quarter and for the full year but the stock trades at a not exactly cheap multiple of 30 times fiscal 2003 earnings estimates.

Qualcomm's valuation is a concern for Teets as well. He has a "hold" rating on the stock. Teets does not own shares of Qualcomm and his firm has no investment banking relationship with the company. Teets also has a "hold" on Motorola but a "buy" on Nokia.

Motorola, in addition to cell phones, has a major presence in semiconductors, networking equipment and cable set-top boxes, and it trades at 23 times earnings. But Nokia, which also has a networking equipment division, trades at just 17 times earnings. So it looks like the better value, especially since its fundamentals are in better shape.

To be sure, the networking equipment divisions of both companies will probably struggle since telecom service providers, which include wireless companies like AT&T Wireless and Sprint PCS as well as regional phone companies Verizon, SBC Communications and BellSouth, continue to pare back their capital spending plans. Motorola, for example, reported that sales for its networking division slipped 11 percent in the fourth quarter from a year ago and that orders were down 3 percent.

But companies like Ericsson, Lucent and Nortel are more likely to feel the pinch of lower capital spending than either Motorola or Nokia. Networking revenue accounted for 16 percent of Motorola's sales in the fourth quarter while Nokia's networking business was 21 percent of the company's total revenues in the third quarter.  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.