Goodbye Moto, Hello Nokia!

By Vitaliy Katsenelson, CFA It seems that Motorola (MOT) comes out with a good handset that everybody wants every five years or so. Considering that, we have a couple more years to go until the company will have another blockbuster handset again.  This failure by Motorola is a big positive for Nokia (NOK) on many…

By Vitaliy Katsenelson, CFA

It seems that Motorola (MOT) comes out with a good handset that everybody wants every five years or so. Considering that, we have a couple more years to go until the company will have another blockbuster handset again.  This failure by Motorola is a big positive for Nokia (NOK) on many fronts.

Or to piggyback on a well-known Motorola advertising tagline: Goodbye, Moto — and hello, Nokia.

First, it shows that Nokia’s management can execute despite not having the “hottest” phone on the market (i.e. Motorola’s Razr). Also, it will be further taking market share from Motorola; I estimate its margins will further improve, driving its earnings north of $2 a share over the next couple of years. After seeing Nokia’s second-quarter results, that estimate could come sooner rather than later.

The best part is Nokia doesn’t have to do anything heroic to achieve that goal. Operational leverage (higher volumes spread over fixed costs) and a shift to a higher margin (more feature-rich phones) will do the work. This was the driver of the company’s truly incredible operating performance in the second quarter.

The second quarter was simply spectacular: operating profit in every segment with the exception of its networks division grew in the high double digits, and sales climbed a whopping 28%.

At the current share price, you are not really paying for the network segment, in fact, since it loses money it detracts from the company’s valuation. But at some point its profitability will turn positive and the division will become a contributor to Nokia’s bottom line.

Samsung is a conglomerate, and although it’s a good one, it still lacks Nokia’s focus. Despite being located in a lower labor-cost part of the world, South Korea-based Samsung doesn’t have a cost advantage against Nokia, as Finland-based Nokia manufactures its phones all over the world, including in China. Nokia has proved to be the Dell of cell phones from a cost-structure and manufacturing-efficiency perspective and Apple-like when it comes to innovation — it comes out with several dozen phones year after year.

There is still upside in Nokia’s global market share, because Nokia has just a small market share in the U.S., accounting for only 4% of its volume. It is only a matter of time before Nokia starts taking market share in the U.S.; it has already started to design U.S.-centric phones. As Nokia regains market share in the U.S., this will drive its global market share. Despite not having the phones in the U.S. that consumers seemed to want, Nokia still has an excellent brand reputation in the U.S., so it just needs to fix relationships with U.S. carriers (AT&T (T) , Verizon (VZ) and T-Mobile) and start selling phones that the rest of the world is so crazy about.

Disclosure: I have a position in Nokia

Please read the following important disclosure here.

Related Articles

Why I No Longer Mind Losing an Argument

Why I No Longer Mind Losing an Argument

Reflecting on my experience with Dale Carnegie's book, I share how it transformed my approach to criticism and debate, and why I no longer mind losing an argument.

How do I get any research done since I travel a lot?

I get asked at times: How do I get any research done since I travel a lot? To answer this question, I need to explain how we do research.
The Growing Pains of Maturity

The Growing Pains of Maturity

Many times, we bought because they were in their “junior year”; this is what made them undervalued. Our research led us to the conclusion that their difficulties were transitory and that as they matured the market would revalue them.
What is the Value of Apple? How do we evaluate risk?

What is the Value of Apple? How do we evaluate risk?

Today I will share the Q&A section of the letter. Every time I am almost finished with the client letter, I ask clients to send me any questions they have about their portfolio or other topics. I answer these questions in the Q&A section.

Leave a Comment