A Foolish Take on Nokia

By Phil Weiss (TMF Grape)

TOWACO, NJ (April 30, 1999) -- Last week, I asked you to submit nominations for a company to review in this report. Participants on our Rule Maker Companies message board gave the most votes to digital mobile phone giant Nokia Corp. (NYSE: NOK). There were two primary reasons for the nomination of this company. First, as Fool Community contributor "692738" (a.k.a. MYCROFT) has pointed out in numerous posts, Nokia certainly looks like a well-positioned company for the future of wireless communications. Second, Nokia offers a case lesson in evaluating a foreign company.

If you're not too familiar with Nokia, you might be surprised to learn that the company was once a producer of pulp, paper, and rubber goods. It was only during the oil crisis in 1973 that the company started moving its business towards consumer and business electronics. Now, the company is a leading supplier of telecommunications systems and equipment. Its core businesses consist of the development, manufacture, and delivery of operator-driven infrastructure solutions and end-user-driven mobile phones.

Based in Finland, Nokia trades in the U.S. in the form of American Depositary Receipts (ADRs). As a foreign-based company, Nokia is not subject to the same standards for information reporting that the Securities and Exchange Commission (SEC) requires of U.S.-based companies. In addition, its financial statements follow International Accounting Standards (IAS) rather than U.S. Generally Accepted Accounting Principles (GAAP). Many Fools find it difficult to analyze foreign-based companies for these reasons as well as some others. Tonight, I'm going to take a shot at reviewing the company and discuss the obstacles that come up along the way.

Nokia does the best job of making financial information available on the Web of any non-U.S. based company that I've investigated. The company has a whole section of its website dedicated to investors (Nokia Investor Relations), including the company's quarterly press releases and conference calls.

The thing that I liked best, though, was that when I looked at the company's 1998 annual report (.pdf file), I discovered a table on page 40 that details the differences that you'll find in Nokia's financial statements using GAAP instead of IAS. On page 41, there's even an explanation of the factors that cause these differences. Unfortunately, though, the company does not include this information in its quarterly financial statements. Therefore, I decided to look at the company and its competitors based upon the last full year of data. I've posted my analysis of Nokia and its competitors on the Rule Maker Companies message board.

When doing company analysis, I prefer to dig out the numbers on my own from the company's website or SEC filings so that I can use my own judgment in evaluating gray matters such as "extraordinary charges" to earnings. As a result, I did my analysis without relying on any of the canned versions of Nokia's financial statements that can be found on commercial websites like Zacks, Market Guide, and Microsoft Investor.

When I calculated net income, I decided to use the operating income figure from Nokia's 1998 income statement of 10,408 FIM (Finnish Markka). I increased this figure to 10,461 FIM after reading the information found on page 40. I did the same thing in 1997, and this increased net income from 6,259 FIM to 6,396 FIM. In order to find the number of diluted shares outstanding, I looked at footnote 23.

I also made changes to the cash and equivalents section of the balance sheet. I added 530 FIM to cash in 1998 and 114 FIM in 1997. When I was finished, I found that the company had taken home 23 of the 33 available Rule Maker points in the categories of Financial Location and Financial Direction.

The next thing that I had to do was decide which companies to use as competitors in the Monopoly Status category. Here, I ran into the difficulty of competitors that don't match-up apples-to-apples with Nokia. That's because when it comes to mobile phones, Nokia's biggest competitors are Motorola (NYSE: MOT), a company that also has a sizable semiconductor business; and LM Ericsson Telephone Co. (Nasdaq: ERICY), a company that has a networking presence and also produces electronic defense systems.

Finding a third competitor was even tougher. Other companies that I considered were QUALCOMM (Nasdaq: QCOM), Alcatel (NYSE: ALA), Lucent Technologies (NYSE: LU), Sony Corp. (NYSE: SNE), and Nextel (Nasdaq: NXTL). I searched the Web but was unable to determine the fourth largest company in terms of mobile phone sales. I immediately dismissed Sony and Lucent. That left me with a choice among Alcatel, QUALCOMM, and Nextel. In this post, Foolish message board contributor "lrobinso" (a.k.a. The LanceMan), used QUALCOMM as the third competitor in his analysis of Nokia. I decided to choose QUALCOMM as well, but I believe that its increasing level of royalties from its CDMA wireless technology will make it a different company than Nokia in the future, as QUALCOMM earns a 3% royalty on every sale of a mobile phone that uses its technology.

When I put together my spreadsheet, I got my data for Ericsson from the company's 1998 annual report (.pdf file). This data is in SEK (Swedish Krona), but the company's financial statements do not include the information to convert from IAS to GAAP accounting.

I know that this report hasn't included a lot of background on the company or its possibilities, but MYCROFT has contributed so much insight on the message boards that I thought it would be better to just link to a few of his posts, as they serve as great examples of the type of outstanding research that is done in the Fool Community each and every day:

-- Nokia's excellent management (click!)
-- Nokia's record of beating consensus earnings estimates (click!)
-- Nokia's Owner Earnings versus competitors (click!)

Personally, I think that Nokia's rating as a second tier Rule Maker sounds about right for now. I also believe that the company has ever increasing possibilities in the future, so it certainly merits a place on the Rule Maker watch list. It could prove to be a solid holding for those who are willing to accept the higher risk -- and higher potential reward -- that comes from investing in potential Rule Makers. The key is determining whether Nokia is on its way to the top tier in the coming quarters and years.

If you have any questions about this report, please ask them on our Companies Board if they're about Nokia or our Beginner's Board or Strategies Board if they're about the concepts I've discussed. (Boards linked below.)

That's it for me this week. I'll be back next week on Tuesday as we'll be making some changes in how we present our nightly reports. I'm looking forward to spending the weekend with my family as the weather in New Jersey is supposed to be very spring-like.

Have a Foolish weekend,

Phil Weiss (TMFGrape)

04/30/99 Close

Stock Change    Bid
AXP   -4 11/16  130.69
CHV   -3 13/16   99.75
CSCO  +4 7/8    114.06
EK    -2 1/2     74.75
GM    -  15/16   89.06
GPS   +1 5/16    66.56
INTC  +  3/8     61.19
KO    +  1/4     68.06
MSFT  -  3/4     81.31
PFE   -  7/8    115.06
SGP   -  5/16    48.31
TROW  -1 3/16    37.69
XON   -1 7/16    83.06
YHOO  -  5/16   174.69

                  Day     Month  Year    History
        R-MAKER  -0.34%   0.63%  12.09%  41.83%
        S&P:     -0.57%   3.79%   8.94%  34.76%
        NASDAQ:  +0.57%   3.29%  15.97%  53.84%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     81.31   107.78%
   6/23/98   34 Cisco Syst    58.41    114.06    95.28%
    5/1/98   55 Gap Inc.      34.37     66.56    93.67%
   2/13/98   44 Intel         42.34     61.19    44.52%
    2/3/98   22 Pfizer        82.30    115.06    39.81%
   2/17/99   16 Yahoo Inc.   126.31    174.69    38.30%
   5/26/98   18 AmExpress    104.07    130.69    25.58%
    2/6/98   56 T. Rowe Pr    33.67     37.69    11.92%
   8/21/98   44 Schering-P    47.99     48.31     0.67%
   2/27/98   27 Coca-Cola     69.11     68.06    -1.51%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     83.06    29.11%
   3/12/98   17 General Mo    72.41     89.06    23.01%
   3/12/98   15 Chevron       83.34     99.75    19.69%
   3/12/98   20 Eastman Ko    63.15     74.75    18.37%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   3903.00  $2024.55
   6/23/98   34 Cisco Syst  1985.95   3878.13  $1892.18
    5/1/98   55 Gap Inc.    1890.33   3660.94  $1770.61
   2/13/98   44 Intel       1862.83   2692.25   $829.42
   2/17/99   16 Yahoo Inc.  2020.95   2795.00   $774.05
    2/3/98   22 Pfizer      1810.58   2531.38   $720.80
   5/26/98   18 AmExpress   1873.20   2352.38   $479.18
    2/6/98   56 T. Rowe Pr  1885.70   2110.50   $224.80
   8/21/98   44 Schering-P   2111.7   2125.75    $14.05
   2/27/98   27 Coca-Cola   1865.89   1837.69   -$28.20

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1661.25   $374.55
   3/12/98   17 General Mo  1230.89   1514.06   $283.17
   3/12/98   15 Chevron     1250.14   1496.25   $246.11
   3/12/98   20 Eastman Ko  1262.95   1495.00   $232.05

                              CASH     $70.09
                             TOTAL  $34123.65

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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