BARRON'S TAKE
Easy Call on Nokia: Sell
By TIERNAN RAY
The wireless titan reports second-quarter results and dials down expectations, disappointing investors.
NOKIA (TICKER: NOK), the world's biggest cellphone maker, is once again getting a poor reception from investors for failing to excel in a market that it should dominate.
With an aging portfolio that's failed to capture the incremental demand for computer-like smartphones, the Finland-based firm this morning reported second-quarter results about as expected, but said its shipments will decline with the overall cellphone market this year and that it will make even less money than expected.
Nokia's American depositary receipts fell $1.98, or almost 13%, to $13.74 in early trading. At a forward multiple of 16.4 times this year's projected 84 cents -- a number that will doubtless come under greater scrutiny today -- Nokia shares may fall below $11.
Nokia's reported second-quarter sales fell 25%, year over year, to 9.9 billion euros, or $13.9 billion, in line with analysts' estimates, while profit of 15 European cents, or $0.21, was above analysts' 18-cent estimate.
That's the good part.
Nokia won't increase its share of handsets sold this year from last year's 39%, the company said, reversing an earlier forecast offered in April that it would increase share.
And Nokia now expects its operating profit margin on phones to be about in line with results for the first half of the year, at roughly 10% of handset sales. That's down from an expectation of "mid-teens" operating profit.
Fellow laggard Sony Ericsson fared even worse this morning, with sales
falling quarter over quarter, and indicated a similarly gloomy outlook. (See Tech Trader Daily, "Sony Ericsson: The Collapse Continues," July 16, 2009.)
Today's report takes Nokia all the way back to 2005-2006, when it was lagging growth of Motorola (MOT), which excited the world with the Razr. While Nokia crammed its phones with software programs, global positioning system (GPS) capabilities and video editing, Motorola dazzled with slick colors and designs.
As I wrote at the time, Nokia could eventually turn the discussion away from snazzy colors and back to the functions of a phone. (See Weekday Trader, "Nokia Will Be Back in Style," Oct. 23, 2006.)
The smartphone market was Nokia's game to lose, in other words. How humbling, then, for the company to see its buzz usurped by Apple's (AAPL) iPhone, Palm's (PALM) Pre smartphone, and the latest models of BlackBerry from Research in Motion (RIMM).
All those companies are increasing their unit sales, either off a small base, in Palm's case, or with follow-on successes in the case of the other two.
Nokia's sales of handsets in the second quarter, 103 million units, were 15% below the year-earlier period, following a 19% decline in the first quarter. Nokia says its share of the market will remain about flat as total unit shipments for the industry decline 10% this year.
In other words, there are too few cool phones in Nokia's portfolio to offset the overall market decline. Without adequate volume growth, Nokia's profit after the high cost of making and marketing complex phones heads down.
And it's not clear just how Nokia will offer more competitive products.
Its latest ballyhooed smartphone, the N97, was released to blaring house beats at a party in New York last month. It's an okay phone, but not as intriguing as what Apple, Palm, and RIM offer, and I expect it will sell the requisite millions of units then fade from memory.
With developing nations buying tons of phones given their lack of traditional infrastructure, Nokia should be cleaning up, thanks to its respected global brand, low average selling prices and superior distribution network.
But the trend is no friend. Last quarter, phone units in Asia-Pacific fell 17% year over year for Nokia and 42% in Latin America -- the same as the first quarter's decline.
It's easy to see where the stock's headed, however. The dark days of 2006 saw Nokia shares fetch a mere 13 times projected earnings.
Having ceded the field to Apple, Palm and RIM for the present, Nokia may again find itself at a 13 times price-earnings multiple, with far less hope in store than in 2006.
With cuts in estimates a certainty given the gloomy outlook, $11 is unlikely to be the floor for this stock.
