Is Nokia Still a Sell
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Nokia (NYSE: NOK) saw revenues down as much as 9% in 2011 and are expecting to see another decline of 21% this year. This will be perpetuated by an expected 19% fall in handset units and lower average handset prices. Billionaire Ken Griffin - founder of Citadel Investment Group - is still one of Nokia's big-name investors (check out Ken Griffin's latest picks).
Nokia is looking to try and win back share in the high-end market by partnering with Microsoft to offer the tech giant’s newest mobile OS on its Lumia series phones. The competition appears to be too robust for Nokia to be able to carve out a position in the low-cost phone market, though. Even Nokia’s feature phones and smartphones are taking hits in emerging markets (India, China and Africa).
Net sales for the mobile company’s devices & services segment in 3Q 2012 were down 34% year over year and unit sales of smart devices were down 39% yoy. Nokia is also seeing margin compression as it transitions from its legacy operating system to Windows Mobile, where gross margins were down to 28% compared with 31% in the prior year's third quarter. Margin pressure will likely continue in the interim as Nokia also recently reduced the price of its 4G LTE Lumia 900 smartphone by 50%.
From a valuation standpoint, Nokia trades at the bottom of the industry - 0.4x sales - but for good reason. The mobile phone-maker is expected to continue to lose market share, which will help drive its long-term expected EPS growth rate of -1% annually. Nokia also has the highest debt load of the five stocks listed here with a debt to equity ratio of 50%.
Research In Motion (NASDAQ: BBRY) is another mobile carrier that appears to be in similar trouble as Nokia, trading at only 0.5x sales but with better expected growth than its peer. Research In Motion has seen its market share wiped out in a matter of years thanks to Apple’s iPhone and the slew of devices running Google’s popular Android OS.
Research In Motion now owns just 1.6% of the U.S. smartphone market according to the NY Times, down from 8.5% a year ago. Part of what gives us hope that Research In Motion can pull itself past Nokia is its 5-year expected EPS growth rate of 10%. Driving this will be the phone maker's second chance with the U.S. government, which plans to test the Blackberry 10 software. Research In Motion calls billionaire Jim Simons as one of its big-name investors (see all of Jim Simons' top picks).
Ericsson (NASDAQ: ERIC) is the Sweden-based telecommunications company operating in various segments. Ericsson is flat year to date and is facing near term pressures related to Samsung’s filing with the U.S. ITC to ban importation and sale of some Ericsson devices. ERIC trades above NOK and RIMM, but well below other major communications equipment company Cisco at 1.0x sales. Ericsson has been executing a solid turnaround strategy, as its previous 5-year EPS growth came in at -5%, bit is expected to average 6% through 2017. Billionaires Ken Griffin, Ken Fisher and Israel Englander are all invested in Ericsson.
Cisco Systems (NASDAQ: CSCO) is a giant in the communications equipment industry with a market value over $100 billion. Cisco’s biggest growth avenues of late have been a beefing up of operations via acquisitions – having completed three acquisitions already this month in the cloud computing, data infrastructure and network planning areas. Cisco trades much cheaper than Ericsson on a P/E basis at 10x earnings and also has an impressive gross profit margin of 65%, compared to Ericsson’s 35%.
Google (NASDAQ: GOOG) owns over 65% of the U.S. search market. Google also has the leading mobile operating system – Android – under its control, not to mention a handset business with the recent acquisition of Motorola Mobility. Of the five stocks listed here, it is easy to guess that Google has the best long-term growth prospects, with a 14% 5-year expected earnings CAGR. Putting this growth into perspective, we see that Google also trades above the other peers at a 22x earnings and 5x sales. Billionaire Ken Fisher - founder of Fisher Asset Management and long-time Forbes columnist - is one of the most committed investors in Google (see Ken Fisher's big bets).
To recap: we believe that Nokia will continue to see pressures as Apple and Google dominate its market. We like Research In Motion’s potential to resurface as a mid-level mobile carrier, but would be cautious on Nokia.
This article is written by Marshall Hargrave and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has a long position in GOOG. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Cisco Systems and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!