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Nokia: "cell" into strength?
Wall Street is excited about Nokia's recovery but there are better bets in the cell phone business.
October 14, 2004: 12:49 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - Nokia came through again...and the leading maker of cell phones appears to be repairing its bad reputation as a "serial warner."

Nokia on Thursday beat quarterly revenue and earnings estimates -- even after having raised forecasts in September -- and boosted its sales forecast for the current quarter.

Wall Street loved the report. Shares of Nokia (Research) gained nearly 2 percent Thursday. The stock is now up about 13 percent since lifting guidance in September.

"Most people's estimates will be going up for the fourth quarter," said James Faucette, an analyst with Pacific Crest Securities.

What's more, Nokia's recovery will have a broad impact throughout the sector.

But even though Nokia appears to be finally turning the corner after a rough first half of the year, it probably isn't the best way to capitalize on what appears to be booming demand for cell phones and wireless networking equipment.

Nokia indicated that the entire cell phone industry is doing well as consumers still can't get enough of color-screen flip-phones and camera phones. The company said it expects global industry volume of 630 million for 2004, up from its July forecast of more than 600 million.

Scoop up some chips?

With that in mind, Albert Lin, an analyst with American Technology Research, wrote in a report Thursday that several chip companies with heavy exposure to the cell phone market (and not just Nokia) should benefit.

Nokia has enjoyed a nice bounce lately after a brutal spring and summer.  
Nokia has enjoyed a nice bounce lately after a brutal spring and summer.

He cited Texas Instruments (Research), RF Micro Devices (Research), Advanced Micro Devices (Research) and Qualcomm (Research) as four potential plays on this trend.

Greg Gorbatenko, an analyst with Marquis Investment Research, said two other chip companies that are suppliers to big handset makers, Skyworks Solutions (Research) and Triquint Semiconductor (Research), are also poised to gain from a strong fourth quarter for cell phone sales.

There are also Nokia's competitors to consider, particularly Motorola, the world's second largest cell phone maker.

Nokia, despite its solid report and healthy outlook, still has some problems in its cell phone business. The company noted that it continues to lose market share in the United States, a market where Nokia was slow to ship newer cutting-edge phones to carriers and retailers.

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"This bodes well for Motorola," said Gorbatenko. "Nokia isn't really stealing market share. The whole industry is doing well."

In addition, Nokia said that much of its sales upside came from lower priced phones in emerging markets like China. For that reason, the average selling price of Nokia's phones tumbled in the quarter and that had a big impact on operating profit margins for Nokia's handset division.

Margins for the unit were 18.6 percent in the quarter, compared to its lofty 28.8 percent profit margins a year ago. Overall, Nokia's profit margins were 13.4 percent, down from 16.8 percent in the same period a year ago.

"Generally speaking, it was high-volume low-margin business which saved the day for Nokia," said Ren Zamora, an analyst with Loop Capital Markets.

Don't hang up on Motorola and Ericsson

It's worth noting that Nokia's networking equipment business, which had a disastrous 2003, also helped save the day.

Analysts think there may still be momentum for Motorola and Ericsson.  
Analysts think there may still be momentum for Motorola and Ericsson.

The networking equipment unit, which accounted for more than 20 percent of Nokia's total sales, reported a revenue increase of 21 percent from last year. (The cell phone business only saw a 1 percent gain in sales.)

In addition, the networking division reported an operating profit margin of 12.3 percent in the quarter after barely breaking even last year.

Faucette said that Nokia's networking success also is a good sign for Ericsson, another leading maker of wireless telecom equipment. Ericsson also competes with Nokia in the cell phone market through its Sony Ericsson handset joint venture, which also reported strong gains in sales and profits Thursday.

With that in mind, both Ericsson (Research) and Motorola (Research) might be just as attractive, if not more so than Nokia.

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Due to Nokia's recent surge, the stock is no longer as a compelling value as it was a few months ago. Nokia now trades at about 17.5 times 2005 earnings estimates, in line with Ericsson's P/E and only a slight discount to Motorola's multiple of about 19.5.

Both Faucette and Zamora said they prefer Motorola's shares to Nokia's since the jury is still out on whether or not Nokia can gain back share in the U.S.

That will be key since Zamora said the "making it up on volume" game can only go so far. Investors want to see a shift to more profitable phones before rewarding Nokia further.

"I hope Nokia can stabilize its selling prices. That's the hardest point because if volume does slow down and they're still at these levels, Nokia could be in trouble," Zamora said.

Tech Biz Baseball Bet Update: No need for a paternity test. There is no doubt about the fatherly lineage of one Pedro Martinez. The Yanks beat Pedro (again) on Wednesday night and now lead the Sox 2-0 in the ALCS.

So just two more Yankees victories before I feast on some good ol' N.E. clam chowdah courtesy of my colleague Eric Hellweg. Is it too late to ask for a package of oyster crackers as well?

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no banking ties to the companies.


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Most stock quote data provided by BATS. Market indices 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.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.