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Nokia's no value stock
Investors need to realize that the Finnish phone phenom is no longer a high-growth company.
September 9, 2003: 5:35 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - Investors are just saying no to Nokia.

The Finnish phone giant announced Tuesday morning in its mid-quarter update for the third quarter that while profits should be a little better than expected, sales of cell phones will likely be flat to down from a year ago.

Investors had been hoping that Nokia would increase its cell phone sales outlook, especially since chip company RF Micro Devices, one of Nokia's top suppliers, issued a rosy fiscal second quarter forecast on Monday. As a result, Nokia's stock fell more than 5 percent Tuesday morning.

Nokia has been a laggard during this year's big tech rally as well. Despite a nearly 20 percent rally in the past month, shares are up just 7 percent year-to-date compared to a more than 40 percent run for the Nasdaq.

On the surface, this seems a bit odd since Nokia (NOK: Research, Estimates) is by far the leader in the cell phone business. Figures from tech research firm Gartner released last week showed that Nokia's market share was 35.9 percent in the second quarter while second-place Motorola had a market share of 14.6 percent.

Can't make it up on volume

Look closer and Nokia's underperfomance makes sense. For one, Nokia warned in July that sales for the third quarter would be lower than expected due to the weak dollar -- Nokia gets hurt by a weak dollar since phones sold in the U.S. then have to be translated back into euro for revenue recognition purposes.

But with the dollar strengthening in recent weeks, there were growing hopes that Nokia's sales would be better than forecast in July and that helped fuel the stock's rise since early August.

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"Analysts, me included, had left the door wide open for Nokia to raise the revenue outlook given how the dollar has strengthened," said John Bucher, an analyst with Harris Nesbitt Gerard. "That expectation had been built into the stock."

So what went wrong? Nokia said Tuesday that it is still seeing heavy price competition and that average selling prices (ASPs) for its phones will probably decrease in the third quarter from both last year's levels as well as from this year's second quarter.

Part of the problem is that higher-end phones with features such as built-in cameras have not sold as well, indicating that consumers are not willing to pay a much higher price to replace an older phone.

"You can't sell a phone for more than $150. I don't care if it can vacuum your house. Consumers are very price sensitive," said Casey Ryan, an analyst with Wells Fargo Securities.

No longer a high-growth stock

In addition, despite all the marketing hype, let's be honest: there is no urgent need to replace phones. For example, I have been using a Nokia 3390 phone for more than two years and I'm perfectly happy with it. Maybe I'm just cheap but unless I drop the phone down a flight of stairs and break it, I don't think I'll be buying a new one soon. And I'm probably not alone.

"Nokia may be a victim of its own success," said Greg Teets, an analyst with A.G. Edwards. "They have some nice low-end phones and are not giving people an excuse to shop up in the food chain."

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Written by: Paul R. La Monica

Sure, the absolute number of cell phones sold may increase during the next few years as companies target newer markets. Tech research firm IDC said last week that handset shipments should increase by 8 percent in 2004. But Nokia will need to sell more of their pricier models in order for revenues and profits to increase substantially.

To that end, overall revenues for Nokia are expected to increase 10.5 percent this year and 6.2 percent in 2004 while analysts are predicting a slight earnings decline this year, a 14 percent increase next year and an average of 11 percent over the next three to five years.

And that's Nokia's biggest problem. It may be a great company but some analysts say its days of being treated as a growth stock are behind it.

"A lot of people want to be bullish about Nokia because it's easy. Nokia is a market share leader and the best operator but people are buying it as a growth stock and it's not," said Ryan, who has a "sell" rating on Nokia.

Bucher, who likes the stock, says his target price is only $18, just a little more than 10 percent higher than current levels. "What you have in Nokia is a company that is in the process of transitioning from a high double-digit earnings grower to becoming more of a value stock," he said.

And at more than 20 times 2003 earnings estimates, that looks like an expensive value stock to boot.

A.G. Edwards' Teets owns shares of Nokia but his firm has no investment banking relationship with the company. Other analysts quoted in this piece do not own Nokia and their firms have no investment banking relationship with the company.

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