Don't Lose Faith Just Yet
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I always daydream about finding a ‘bulletproof’ stock. A stock to weather the most severe economic downturns and the most egregious economic conditions. During my past experience of living in a developing country for three years, I’ve learned one thing: Other than food and shelter, two things people will just not live without are booze and a cell phone. In this article, I will look at how the top cell phone manufacturer Nokia (NYSE: NOK) is faring in the market.
In terms of market share, the leading cell phone manufacturers are Nokia, Motorola Mobility, a subsidiary of Google (NASDAQ: GOOG), and Samsung, in that order. These three companies hold roughly 58% of the global cell phone market. These are extraordinary times for this market. Microsoft (NASDAQ: MSFT) is nearing the release of its Windows 8 mobile platform and Google has its Android Ice Cream Sandwich platform and a newer version called Jelly Bean. Smartphones differ from cell phones in their capabilities and the defining features of a smartphone are changing with each new software and hardware innovation. Some companies lead the pack and others play “catch-up.”
Nokia, which, at one point held a 30% share of the mobile phone market, is now playing catch-up. First let’s evaluate Nokia’s fundamentals. Nokia is about a $10.8 billion dollar company, currently trading around $3 after seeing a near 10% spike on August 9. The stock has lost about half its value over the past 52 weeks. There is no price to earnings ratio in the absence of earnings, and it has earnings per share (EPS) of negative $1.16. Price to book is fractional, reported at 0.89. Nokia’s return on equity is bleak, reported at -35.65% and no less dismal, is the quarterly year-over-year revenue growth of -18.70%.
There are some bright spots in the fundamentals. Nokia’s debt to equity stands at a very acceptable 50.59 and equally impressive is the current ratio of 1.31. Another plus is the dividend paid to shareholders, which yields 7%. This dividend is more representative of the serious decline in share price than anything else, although it must be acknowledged that were share prices to ‘normalize,’ the 4.9% 5 year average yield is still quite impressive. The payout ratio cannot be calculated in the absence of earnings.
Nokia sits atop a mountain of cash totaling $12.07 billion. This translates to $3.25 in cash for each outstanding share. On this basis alone, one could make a cogent argument for Nokia being undervalued at around $3 per share. On a discounted cash flow basis, the stock is undervalued by almost 110%. Now, this is no reason to load up on Nokia stock. Nokia faces serious challenges to recapturing its leading market share status, not the least of which is Samsung, whose Galaxy smartphones and tablets have captured the attention of Southeast Asian consumers in particular.
The question a potential Nokia investor must answer is, “Will the Nokia launch of its smartphones, based on the Windows 8 operating system, be received by consumers in numbers sufficient to reverse the erosion of its market share by Samsung and other competitors?” Goldman Sachs (GS) seems to have answered this question with an emphatic no, having slashed its rating from neutral to sell, and establishing a price objective of $1.60. This may be, in part, because Samsung, Huawei, HTC also will also manufacture phones with the Windows 8 operating system.
Nokia is poised to be the first manufacturer to release phones on this system. Nokia has been extremely successful with its Lumia family of smartphones, shipping 4 million units in the most recent quarter, and this certainly bodes well for robust Lumia sales operating with Windows 8. My concern is, Nokia’s deep staffing reductions may impair its ability to meet market demand. That would be disastrous, conceivably allowing Samsung and other competitors to pick up the slack. Nokia separated almost 10,000 workers last year and is releasing another 4,000 this year on plans to move production to Asia. I question Nokia’s ability to ramp up production and meet demand under this scenario.
This is a fiercely competitive business. It is competitive on two fronts: hardware and software. All cell phone manufacturers are at the mercy of the consumer. To predict winners and losers is a daunting prospect which goes well beyond any fundamental or technical analysis. Nokia has halved prices on Lumia 900 phone in an effort to capture market share in the United States. I wouldn’t be surprised to see Nokia snapped up by Microsoft. Nokia's market cap is not much greater than the $8.5 billion Microsoft paid for Internet phone company Skype just this past year.
Frankly, I am not prepared to write Nokia off. Microsoft has a vested interest in Nokia succeeding, if not in capital, certainly in prestige. I believe it is unlikely that Nokia will regain the top spot in the cell phone market, but I’m reasonably certain they will survive, though that survival may be in the form of a merger or acquisition.
The recent 10% spike is encouraging, but I plan to stay on the sidelines until Nokia introduces its Lumia with the Windows 8 operating system. Then we can see which way the wind is blowing and make a more informed decision about the stock. The less risk averse investor may want to step in now and take the chance that the launch is favorably received. Not a strategy I’m comfortable with, but to each his own. As for me, I’m still on the hunt for that “bulletproof” stock.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services recommend Google and Nokia. 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.If you have questions about this post or the Fool’s blog network, click here for information.