29th May 2012
In theory, value investors should be falling over themselves to own Nokia – or at least take a good look at it. The Finnish mobile phone manufacturer has been a poor performer in share-price terms for a significant period of time and, from a peak of €65 (£52) in June 2000, it now languishes around €2 a share.
Yet despite this fall, Nokia remains one of largest mobile phone manufacturers in the world. Brazil, Russia, India and China, the fast growing ‘BRIC' economies, make up Nokia's top four largest end- markets. In addition, the Nokia brand remains one of the most recognised brands in the world. This brand recognition stems from involvement from the dawn of the mobile phone era, a history which also provides the company with a sizable portfolio of patents relating to the creation of mobile phones and networks, which today generate €500m of profit per year.
Unfortunately for Nokia, customers are not as loyal to brands as they once were – and Nokia finds itself caught between two very powerful pincers. At the top end mobile phone users have had their heads turned by the likes of Apple; at the bottom end price is a more important competitive dynamic than brand.
Nevertheless, the share price had been so precipitous it could be argued the company was cheap enough to protect the investment from this pressure. The balance sheet was strong, dividend attractive, and the company remained cash generative, at least until the first quarter of this year. Although three months is neither here nor there in the context of a long-term investment, they were sufficiently dreadful as to put that whole investment case in jeopardy.
Apple and China are two forces even a business as great as Nokia has difficulty fighting against. Illustrating the power of the pincers, the recent first quarter results 2012 revealed the company sold 40% fewer mobile phones than in the first quarter of 2011. Sales of their lower-end phones in China were down 70% as cheaper domestic brands took market share. Meanwhile the launch of its new flagship phone in 30-odd markets has been met with indifference and, as a result, Nokia is now eating into its cash pile very quickly indeed. With more than double the number of staff than Apple, the business almost certainly requires extensive cost cutting, cost cutting made more expensive due to its European footprint.
The balance sheet strength has been the saving grace for Nokia investors until this point. However, the current performance of the group means this strength is declining every day, while the cost of restructuring will further eat into this level of protection.
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