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.

Continue reading…


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17 thoughts on “Nokia”

  1. Jim M. says:

    “So there is a danger that the Bank of England is misleading us in an
    attempt to divert us from the reality that our banks are in effect being
    bailed out one more time and in the case of two of our larger ones cut
    lending in response!”

    Fear not, Shaun! I’m sure those nice chaps at the OBR will be along to reassure us any moment now.
    And at least your MP replied this time. Things are looking up!

    1. Anonymous says:

      Hi Jim
      Yes she was very prompt replying at 8.08 am on January 2nd! Its the content aka nothing to do with us, that disturbs me as our elected representatives seem to claim that for more and more….

  2. KDH says:

    The BOE is forecasting the housing market to improve! Time to prepare for the overdue correction then. Is this the same as their predictions of inflation falling in the future? Their track-record is laughable; it’s seems clear that the ‘powers that be’ have little control/idea over where things are going.

    1. Anonymous says:

      Hi KDH
      There were the claims the Bank of England made about the effectiveness of Quantitative Easing too. A subject they are much quieter about these days presumably hoping that many do not know what counterfactual means. After all otherwise people may get restless and ask what bang they got for a £375 billion buck.

  3. James says:

    There is something else going on at the banks as well, which makes me nervous about their position, namely the reduction in rates paid to savers over the last 12 months. I managed to get 3% easily a year ago, now the best without major restrictions is around 2%. This is a period where mortgage rates have gone up. It makes me think that they have no need for money, as they are not lending any out…

    1. Anonymous says:

      Hi James
      It is true that savers in bank and building society accounts are being squeezed as interest rates for them drop. This is a consequence of the FLS scheme as cheaper money can be got from the Bank of England.
      Odd that when you consider that after the credit crunch we were promised that remembering Northern Rock they would prioritise retail or savers funding. How quickly our authorities forget!

  4. WilliamOne says:

    I wonder how independent the honours system is, I mean within weeks of Lord Green getting his peerage last year he was sitting in the cabinet running the country!

    1. James says:

      Luckily, “Sir” Hector Sants has taken a job at Barclays, so presumably won’t be in the cabinet quite yet. I hope that you’ve all sold your shares in Barclays before he gets hold of it…

    2. Anonymous says:

      Hi William and welcome to my part of the blogosphere.

      Thanks for pointing that out I didnt realise that the chairman of HSBC got his peerage so recently. So apparently whilst HSBC was “breaking US sanctions against Iran and laundering money for Columbian and Mexican drug cartels” its chairman was earning a peerage!
      If some of this was in the fiction section of the library it would be rejected as too far-fetched.

  5. Anonymous says:

    Unfortunately, the distorting effect of the ZIRP looks like being permanent. As the Bank says, that should encourage lending. If we believe anything they say!

    1. Anonymous says:

      Except of course for the fact that the various rounds of Quantitative Easing came with similar promises.

  6. Alex says:

    yeah yeah… let us not forget what was it? March?? we were being warned of the impending hose pipe ban. With all the modern education, new improved super computers and of course the most beautiful weather girls to present we actually got….

    And this line even I can copy and paste from that report…

    “Much more research is needed to understand more about the causes and potential implications.”

    and no doubt that’s just the line that will appear in the Bank of England’s report in 6 months time about why the housing market boom didn’t materialise. If only we didn’t have stuffy crusty bankers but weather girls doing their job we might get more sense – atleast on weather if not the economy too.

    Real result? Further price pressure on food stuffs = rising prices. More of the same.

    1. Anonymous says:

      Hi Alex

      i too was wondering today whether those who warned us about drought in the UK in the spring at the Met Office are now those after at least 6 months of rain,rain,rain are now telling us extreme rain is more likely……

      Sadly those that need some rain do not seem to be getting it. From Bloomberg.

      “Wheat rose for the first time this week as drought persists in the U.S. southern Great Plains, where winter varieties have gone dormant.

      Snow that fell across the Midwest last week did little to help parched soil recover from the worst drought since the Dust Bowl of the 1930s. Parched conditions grip 61 percent of the 48 contiguous U.S. states, according to the U.S. Drought Monitor in Lincoln, Nebraska”

      1. Old Spanky says:

        I don’t wish to steer the conversation off into the long weeds of climate-change dogma, but rather to pursue the theme of being misled by those who should know better: according to the Palmer Drought Severity Index the drought conditions of the Dust Bowl era have been exceeded many times, and the 2012 drought was really rather moderate by comparison.

        1. JW says:

          Yes its interesting how dry spells in the US midwest usually coincides with wet spells in northern europe. El nino , 4 to 12 year cycles, absolutely nothing to do with ‘plant food’.

  7. Carl Thomas says:

    There I was thinking Funding for Lending Scheme was supposed to be to supply capital to productive businesses rather than propping up property prices and ensuring capital continues to go into unproductive mortgage interest.

    Silly me.

  8. It is sad that so many fell for the hype of taking out mortgages and loans and persuaded into thinking that it was to their own benefit. In actual fact their debt and misery was, and always will be, for the creation of wealth and prosperity for the bankers and lenders. A slow drip feed from your pay packet that redistributes wealth from the bottom to the top. Even if you have managed to pay off that debt millstone from around your neck your “investment” is worth no more than before because of inflation.

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