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Pick up the phone
Shares of cell phone leaders Nokia and Motorola look attractive as demand appears to improve.
April 19, 2005: 7:22 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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Motorola's sleek Razr phone looks cool...and a good image is costly. The phone sells for $499.
Motorola's sleek Razr phone looks cool...and a good image is costly. The phone sells for $499.
Nokia hopes to have a hit with its 6682 smartphone, due out in the U.S. sometime in the second quarter of this year.
Nokia hopes to have a hit with its 6682 smartphone, due out in the U.S. sometime in the second quarter of this year.
Cell sell: Investors have hung up on shares of handset market leaders Nokia and Motorola this year.
Cell sell: Investors have hung up on shares of handset market leaders Nokia and Motorola this year.

NEW YORK (CNN/Money) - Texas Instruments confirmed on Monday that the sky isn't falling in tech. And that may be particularly good news for Nokia and Motorola.

That TI (Research), the biggest maker of processors used in cell phones, hinted at improving demand is good news for Nokia, the No. 1 cell phone maker and TI's largest customer, and for Motorola, No. 2 in the industry.

"Texas Instruments reaffirmed that some of the fears in the marketplace were unfounded," said Albert Lin, an analyst with American Technology Research.

TI's good news gave a boost to both stocks on Tuesday morning. Both firms will report their first quarter earnings later this week and investors are now clearly betting on more signs of healthy demand.

Motorola's (up $0.11 to $14.72, Research) numbers are due out Wednesday afternoon. Analysts are predicting sales of $7.7 billion, an increase of 4 percent from a year ago and earnings of 19 cents per a share. Last year's sales figures have been readjusted to reflect the spin-off of Motorola's chip business Freescale Semiconductor (Research).

For Nokia (up $0.58 to $15.26, Research), which reports Thursday morning, analysts expect revenue growth of 17 percent, to $9.4 billion but for earnings to decrease 10 percent, to 20 cents per share.

Momentum building?

Analysts will be focusing keenly on what type of guidance the companies give to see if recent momentum for both companies is continuing.

Nokia, for example, stumbled last year due to a poor product mix. It was slow introducing so-called clamshell phones (those that flip open) and lost share to Motorola and other rivals. Motorola, which in 2003 also experienced problems with product introductions, has bounced back with hot new products under CEO Ed Zander.

There are indications that Nokia is beginning to regain share. More importantly, it doesn't appear to be resorting to aggressive price cuts to do so. As such, first-quarter earnings estimates for Nokia have risen about 11 percent in the past 3 months.

Ted Parrish, co-manager of the Henssler Equity fund, which owns about 400,000 shares of Nokia, said that Nokia is making the right move to focus on markets outside the United States, mainly in Europe, where more advanced 3G wireless networks have been deployed.

3G phones should have higher average selling prices (ASP) and higher profit margins than many other models, Parrish said. And that's a big plus since pricing pressure in the industry is still a problem.

Samsung, the No. 3 cell phone maker, reported record shipments of phones in the first quarter last week but warned that ASPs would probably decline in the second quarter due to tough competition.

Sony Ericsson, ranked No . 6, reported that first-quarter sales and profits were lower than last year even though the number of cell phones shipped increased by 7 percent. Sony Ericsson is a joint venture of Sony (Research) and Sweden's Ericsson (Research).

So if Nokia can buck the trend of lower ASPs, that would be a big positive for the stock.

Listen to the music

Motorola is also trying to focus on more expensive phones. The company appears to have a hit on its hands with its sleek Razr V3 phone, which sells for nearly $500. (Parrish joked that even though he doesn't own Motorola stock in his fund, he did recently buy the Razr because of how good the phone looks.)

And image, as tennis star Andre Agassi once said, is everything. That's especially true when it comes to cell phones. Lin thinks Nokia and Motorola are benefiting this year because their phones, for lack of a better term, are the coolest.

"What's hot in cell phones last year isn't going to be hot this year. Nokia and Motorola are on the rise because they have product cachet now," Lin said.

And going forward, both Nokia and Motorola could reap rewards as they increasingly try to build in music capabilities to their phones.

Motorola is working on an iTunes phone with Apple (Research) and also has plans to launch an Internet radio service for downloading music to phones. Nokia has several phones with MP3 playing capabilities already on the market and will be introducing more later this year.

Consumers have so far shown a willingness to pay up for high-tech music gadgets like Apple's iPod. So if cell phone makers can get a bigger cut of this market, that could help boost ASPs and profits.

"The new killer app in phones is music," said Greg Gorbatenko, an analyst with Marquis Investment Research. "If people are willing to pay $200 for an iPod mini that bodes well for cell phone ASPs."

With all this in mind, it looks like both stocks could be a good bargain ahead of their reports. Shares of each company trade at the relatively inexpensive valuation of about 15 times 2005 earnings estimates and earnings are expected to increase at a 10 percent clip annually for the next five years.

For more about personal technology, click here.

For a look at more telecom stocks, click here.

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


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