Thursday, April 20, 2006

Nokia: Slim Phones, Fatter Margins

By Vitaliy Katsenelson, CFA
April 11, 2006 - The Motley Fool
Nokia (NYSE: NOK) announced that its average selling price (ASP) has increased in the first quarter from a projected 98 euros to 103 euros. This is great news for the company. Over the last several quarters, Nokia has demonstrated very high revenue growth, but its margins have taken a hit as lower-priced introductory cell phones in China and India reduced ASP and margins.
If higher ASP is the start of a new trend -- and I believe it is -- net income will likely jump as operational leverage kicks into a higher gear. In addition, Nokia's media phone division (consisting of higher-end consumer phones) stopped bleeding money over the last couple quarters and went solidly into the green. The division's operating profit margins of 14% still have plenty of growth ahead of them, since they are much lower than the mobile group's 17% operating margins.
Even the U.S. market, which Nokia mostly lost a couple years ago to Motorola's (NYSE: MOT) superior U.S. phones and other competitors' clamshell designs, seems to be doing better, with more new phones becoming available for the U.S. consumers. However, the United States isn't crucial for Nokia's success; it only represents about 8% of Nokia's sales, and the company's market-share position in the U.S. has stabilized in 2005. As long as its market share doesn't take a drastic dive, the rest of the world should carry a growth torch for Nokia.
At today's valuation of about 18 times 2006 estimates, Nokia is no longer a value manager's dream per se. But as earnings estimates start climbing, it is likely to turn into the growth and momentum managers' paradise.


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