Professional Documents
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• Nokia blends well with the LWF’s strategy and goals. The firm is in excellent financial condition, with little
debt and the ability to generate substantial free cash flow (capital spending is only 1.5% of sales).
Management is competent and modestly compensated, and has a tight grip on cost control. Large profit
margins have moderated in recent years as the average selling price of handsets have declined, yet earnings
power remains strong. Nokia’s ROE and ROA are larger than all of its largest competitors. Though the
aggregate market growth for mobile phones is stabilizing, Nokia remains the sales leader in the industry. It
has 36% market share of the global wireless handset market, twice that of its closest competitor, Motorola.
Nokia is also the dominant provider of mobile phones in emerging markets, where it has 45% market share.
Its institutional following is low, with the Fidelity Magellan Fund holding the largest amount (2.26%) of
shares.
• Business Summary: Nokia is the world’s largest manufacturer of mobile phones (e.g. Nokia N95), and also
produces networking equipment (e.g. switches), multimedia applications (e.g. Ovi portal), and enterprise-level
solutions for security and mobile connectivity (e.g. wireless e-mail services). It operates four business
segments. The Mobile Phones segment connects people by providing mobile voice and data capabilities
across a range of mobile devices. The Multimedia segment provides mobile multimedia experiences to
consumers in the form of advanced mobile devices and applications with connectivity over multiple
technology standards. The Enterprise Solutions segment offers businesses and institutions a range of products
and solutions, including enterprise-grade mobile devices, underlying security infrastructure, software and
services. The Networks segment provides network infrastructure, communications and networks service
platforms, as well as professional services to operators and service providers (Reuters, 2007). Sales for
Mobile Phones in 2006 were $24,769 mil with a margin of 13.25%, sales for Multimedia were $7,877mil with
a margin of 12.5%, sales for Networks were $7,453 mil with a margin of 5.3%, and sales for Enterprise
Solutions were $1,031 mil with a margin of -25%. Nokia’s growth strategy includes expanding their presence
in subscriber services to increase margins, smooth seasonalities, and increase subscriber retention (Merrill
Lynch, 2007). It also will increase product offerings for smartphones, which have higher margins and have
the capability to use Nokia’s service offerings. Nokia will also continue to aggressively compete in the
handset market in developing economies.
• Growth Strategy: Nokia’s growth strategy includes expanding its presence in subscriber services to increase
margins, smooth seasonalities, and increase subscriber retention (Merrill Lynch, 2007). This can include
navigation services from its Navteq subsidiary, or multimedia/gaming offerings from its Ovi portal. Nokia
also will increase product offerings for smartphones, which have higher margins and have the capability to
utilize its service offerings. Nokia will also continue to aggressively compete in the handset market in
developing economies. Through its joint venture with Siemens, Nokia Siemens Networks (NSN) produces
network hardware that is steadily rising in sales. Nokia is also prepared to enter the wireless broadband
market with its WiMAX infrastructure equipment. Nokia relies on effective marketing and a market
segmentation strategy to target different phones at different customer niches (Morningstar, 2007).
• Nokia has a 5 year revenue growth of 5.86%, which is lower than Qualcomm and Motorola. This can be
explained by Nokia’s poor sales in 2004 and 2005, when it missed demand shifts towards clamshell-style or
“flip” phones (Morningstar, 2007). This resulted in lower sales and loss of market share. Nokia has since
rebounded, and its sales are projected to grow at a rate of 6.05%. This rate is reasonable, considering that
most of Nokia’s future sales will be replacement phones, not new subscribers. The growth in new subscribers,
at one time very rapid, has slowed significantly and the cell phone replacement cycle is more consistent with
growth rates in the single digits. Nokia states that 65% of volume in 2007 will be attributable to replacement.
Nokia’s rate is also achievable assuming it does not miss another important consumer trend, and the demand
for smartphones continues to be high. Future trends include more convergence with mobile phones,
computers, and other electronic devices. As smartphones become more complicated, Nokia could find itself
competing against large software companies, like Microsoft. As with mobile phones currently, average
selling prices of smartphones will begin to fall and profit margins will begin to shrink as competition
increases. There will be an increasing demand for mobile data, and Nokia can position itself as both the
device manufacturer, the content source, and the infrastructure provider. Nokia will need to rely more on its
Multimedia, Networks, and Enterprise Services segments as the mobile phone market matures.
• Management: Nokia has benefitted from effective management. Its ROE, ROA, and ROIC are all higher
than all of its major competitors. Nokia’s ROE is almost 3 times larger than Qualcomm’s. It also has higher
inventory turnover and asset turnover than its closest competitors, indicating that Nokia is more efficient at
using its assets and inventory in generating revenue than Qualcomm, Motorola, and Ericsson. Nokia has not
been aggressive with acquisitions, having acquired only 10 companies in the past six years. Most of these
acquisitions were wireless Internet services businesses, which augmented Nokia’s position in offering
subscriber services. Management has been known to set overly optimistic expectations and fail to meet them,
however expectations have been more realistic lately. Management has a reputation for cutting costs. The
firm does not issue many options, and options represented less that 5% of shares outstanding in 2005. For a
technology firm, Nokia’s salaries for management are very reasonable. Management also owns less than 1%
of total equity, and has been reducing the number of shares outstanding by 5%/year through buybacks.
• EPS 2007 $1.81, Forecast EPS 2008 $2.15, Forecast EPS 2009 $2.33.
Indicated Present Value Range (Ouma Model Summary): High Mid Low
P/E @ 8.3% PE range 12.0x to 22.0x $46 $36 $26
Stock Performance Graph (last 5 years):
WF Industry Sheet here
Nokia
COMPANY BASICS
Ticker: NO
Date: 11/2/
Price: $37
Last Dividend: $
P/E (next year's EPS)