Foolish Forecast: You Need Nokia

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The Finnish phone professionals of Nokia (NYSE: NOK) are gearing up for a third-quarter financial report on Thursday morning.

What Fools say:
Here's how Nokia's CAPS rating stacks up against some of its peers and competitors:

	Market Cap (billions)	Trailing P/E Ratio	CAPS Rating
Nokia	$63.4	8.7	****
QUALCOMM (Nasdaq: QCOM)	$65.3	19.3	****
Research In Motion (Nasdaq: RIMM)	$34.1	19.7	**
LM Ericsson Telephone (Nasdaq: ERIC)	$22.3	11.1	***
Motorola (NYSE: MOT)	$12.4	N/A	**

Data taken from Motley Fool CAPS on 10/14/2008.

"In a recession, one of the first things to go will be fancy phones," says CAPS player SwordAgain in support of a thumbs-down rating on Nokia. But where the bears see macroeconomic issues, bulls like AlNameless focus on the fundamentals: "Nokia has dominant market share. Very low P/E, almost debt-free, a significant dividend of almost 5%, but still a payout ratio of only 30%. They prefer losing some market share temporarily to protect the bottom line. This is a prudent approach. An outperformer."

What management does:
The gross margin is still expanding in an impressive show of market muscle and pricing power. The next trick I'm looking for is how to turn that power into copious cash flows. That's where the Finns have fallen down recently.

Margins	3/2007	6/2007	9/2007	12/2007	3/2008	6/2008
Gross	32.4%	31.9%	32.7%	34.5%	35.1%	35.7%
Operating	12.7%	13.9%	14.7%	13.9%	13.7%	11.9%
Net	10.2%	13.4%	14.1%	14.1%	13.8%	10.5%
FCF/Revenue	10.9%	11.6%	12.9%	14.0%	11.6%	11.3%

Growth (YOY)	3/2007	6/2007	9/2007	12/2007	3/2008	6/2008
Revenue	14.2%	16.3%	18.3%	24.2%	29.9%	23.0%
Earnings	11.5%	43.0%	61.8%	67.3%	75.8%	(3.4%)

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
I thought Nokia was cheap three months ago, but the sale has gone even deeper, and those American depositary shares are 30% less expensive today.

Of course, that discount has its reasons. Competition is fierce in the cell-phone market, including fancy new offerings at the high end. The BlackBerry Storm, Apple's (Nasdaq: AAPL) iPhone, and Google's (Nasdaq: GOOG) Android platform all hope to steal a march on the high-margin smartphone segment.

So, Nokia acknowledged these competitive forces in early September and warned of slower sales growth. "Nokia's strategy is to take market share only when the company believes it to be sustainably profitable in the long term," management said.

I'd take prudent growth over blind market share chasing any day, especially in these turbulent times. Nokia is one of the latest additions to our Motley Fool Inside Value roster, so the elder Fools behind that recommendation clearly feel the same way. The third-quarter report is but another milepost on the marathon road to market-crushing long-term investment returns.