I'm writing today about Finnish cell phone giant Nokia
Of Finns and first-quarter failures
Now that we've cleared that up, let's turn to the issue at hand. The sky is falling in Finland, and it's landing on top of Nokia. At least, that's what you'd have to assume, given the hundreds of bombastic headlines devoted to the firm's recent announcement that its first-quarter sales will come in below guidance.
OK, the issue's more than missed guidance. The firm had hoped for a revenue increase on the order of 3% to 7%, and it now says sales will be 2% less than in the prior-year period. There is a silver lining to this gathering thunderhead: Despite the company dropping the ball in sales, earnings are expected to come in at the low end of guidance, EUR 0.17. But judging from the market's reaction, no one's paying attention to that sliver of hope. Since the announcement, Nokia's shares have dropped 20%. Below $17, the price sits nearly 30% below the 52-week high reached just a month ago.
Much ado about market share
Missing sales targets is bad enough with a brittle investing public looking for any excuse to panic, but as Fool phone aficionado Chris Mallon pointed out yesterday, the real salt in the wound is Nokia's lost market share. Nokia gave up 2.3 points to finish the quarter with only 35.7% of the world's cell phone users. Competitors like Motorola
Investors might wonder, as did fellow Fool Bill Mann, whether Nokia's foray into other consumer electronics products, like its set-top receivers, means that the firm has taken its eye off the ball. I'm intrigued, but baffled by the sleek little game taco, the N-Gage, wondering why anyone could possibly need a device that combined a phone, game deck, Web browser, and MP3 player. But then again, I'm a fan of discrete units: I don't like my peas to touch my potatoes, either, and I'm obviously not among Nokia's target audience. I think camera phones are goofy, too, but they're selling at a faster clip than the rest of the offerings in the mobile communications arena, increasing by a factor of five in 2003.
As if the botched sales weren't enough to deal with, several members of Nokia's management, including Chairman and CEO Jorma Ollila became the targets of a class action lawsuit. Yes, the jackals are nosing around already: Milberg Weiss Bershad Hynes & Lerach are trying to bleed the firm on the charge that Nokia's guidance between January and April is in violation of rule 10b-5 of the Securities Exchange Act. Basically, they're trying to say that the previous missed guidance constitutes fraud.
Although this all sounds bad, I would argue, in the words of Caddyshack pool-scrubber Carl Spangler, "It's no big deal."
Sisu, in spades
Let me qualify that. If Nokia continues to stumble, investors will need to get worried. But Nokia is no Ciena
I realized that when, amid the Nokia panic this week, that Aronen kid I mentioned above sent me an email. His shares were taking a major kick in the housut (pants), but he wasn't freaking out. He calmly reminded me -- although, I think he was really reminding himself -- of why someone should be invested in Nokia in the first place. He was displaying sisu, which is a legendary Finnish characteristic that is sometimes defined as "pride and fortitude in the face of adversity" and sometimes as "stubbornness beyond reason."
A brief peek at Nokia's performance shows that the firm has sisu -- by the first definition -- in spades.
Take a look at sales (in millions) over the past half-decade:
Despite that tough 2001, the company has maintained admirable, steady revenue growth. OK, how about earnings? How do these years look?:
Again, there are a couple of fliers in there, but Nokia's earnings have been consistent, and consistently improving.
Fans of free cash flow will be interested in this five years' worth of green (in millions).
Obviously, this company is no earnings-only showoff. It brings in a lot more cash than it spends, and it sends a good portion of the spare change to investors in the form of a dividend. Nokia is also looking at future stock repurchases, which should pay off for investors, given the firm's historical returns on equity, in the mid-20% range, and assets, in the mid-teens.
The bottom line
In his article last month, Chris Mallon crunched some numbers to illustrate that Nokia looked like a better deal than Motorola based on its enterprise value-to-free cash flow ratio. Back then, the EV/FCF ratio stood near 14.1. Today, it hovers around 11.2. That's roughly half the cost of the market as a whole, folks. Sure, Nokia's no screaming growth stock anymore, but for that price, you get a pretty solid market leader with one of the world's most popular brand names, a company that's expected to keep growing at about 10%-15% for the next few years. I can find you 1,000 crummier investment ideas in less than 10 seconds.
There will be a better opportunity to evaluate Nokia's future when it releases first-quarter earnings on April 16, but there may not be too many chances like this one -- an opportunity to profit from the panic and buy a great company at a good price. Nokia's history of sisu is reason enough to believe that the firm will recover from this setback in short order.
Seth has a strong opinion on what to do with Nokia right now. If you'd like investing advice -- and The Motley Fool's best stock ideas -- delivered to your home every month, check out our investment newsletters. And don't forget to talk Finn phones on the Fool's Nokia discussion board.
Fool contributor Seth Jayson knows several Finnish curses and prefers to cool off after his sauna with a dip in a 34-degree lake. He has no stake in any company mentioned above. View his Fool profile here. The Motley Fool is investors writing for investors.