Readers, if I might impose, I require your assistance for a moment. May I please have 15 volunteers? You, sir. In the back. And ma'am, thank you, too. ... OK, that's enough. That's 15.
Now, will the young lady in yellow please take one step forward. Everyone else, please look at her, and marvel. If our 15 volunteers here represent the population of the world, the young lady in yellow represents the proportion of that population that bought a Nokia (NYSE: NOK) brand cell phone last year.
Good news and more good news
You can look at this either of two ways -- both positive. First, although one out of 15 doesn't seem like a lot, it means there are 14 other potential Nokia shoppers still out there. Nokia has roughly 39% of the world market share in the mobile-phone industry.
Gunning for its customers are Sony (NYSE: SNE), Apple (Nasdaq: AAPL) with its iPhone, and Research In Motion (Nasdaq: RIMM) with its addictive BlackBerry -- and I hear some people are still buying Motorolas (NYSE: MOT).
Second, I marvel at the fact that in a single year, one-fifteenth of the world's population bought a product from Nokia. Not many companies can say something like that; PepsiCo or Coca-Cola maybe, but it's a lot easier to "buy the world a Coke" than it is to get one-fifteenth of the world to ante up a hundred bucks for a piece of technological wizardry.
Oh, yes, the earnings
Which brings me to the point of today's column. Last week, I praised Nokia for its amazing performance in expanding profit margins in the highly competitive field of cell-phone sales. A couple of days later, my Foolish colleague Tim Beyers mused whether now is the time to sell Nokia. (More on that in a moment.) It will come as no surprise that my answer is "no." Let me explain.
Nokia reported its fiscal Q1 2008 earnings last week. Mr. Market didn't like the news -- selling off the shares to the tune of 14% when Nokia reported earning of $0.51 per American depositary share (ADS), rather than the $0.57 that Wall Street had expected. Now, that sounds bad, but consider a few caveats: First, Nokia slightly edged out estimates for its revenue, booking just a whisker under $20 billion, whereas the pundits had predicted $19.8 billion. Second, operating profit grew in line with revenue at 28%.
Third and finally, it did so as Nokia's average selling price on handsets declined 11% to $125, and Nokia's gross margins rose regardless. In fact, the main reason that profits failed to outperform sales last quarter was that Nokia took a raft of one-time charges to earnings: $286 million for restructuring and impairment charges, and another $445 million related to pension obligations.
Without these charges, Nokia would have earned around $0.60 per ADS in profit, and beaten analyst estimates.
So where's the bad news in that?
Nowhere, and as Tim mentioned in his column on Thursday, the first-quarter earnings report is not what prompted him to consider selling Nokia. Rather, Tim takes issue with a bit of bluster that Nokia CEO Olli-Pekka Kallasvuo voiced on CNBC after the earnings news broke. Asked whether Apple would steal market share from Nokia in Europe this year, Kallasvuo dissed the iPhone as a "niche product."
Now, if Kallasvuo really believed what he said, I suspect I'd be agreeing with Tim right now. I don't care if you're planning a response to a competitor's product, a containment strategy for the mortgage crisis, or an invasion of Russia in the winter, underestimating a challenge is never good policy. But from where I sit, it seems more likely that Kallasvuo was politely declining to concede that Apple will eat Nokia's lunch in Europe.
Buy the numbers
So let us assume that Nokia does not intend to roll over and play dead for Apple. In that case, does Nokia remain an attractive investment? To my mind, it does. And moreover, after last week's sell-off, the shares are finally looking cheap again.
With a trailing P/E of 10, Nokia seems attractively priced relative to its 12% anticipated earnings growth. Free cash flow in Q1 was weaker than a year ago, but even after this blip, Nokia has still racked up around $9.6 billion in free cash flow over the past 12 months. Thus, Nokia's price-to-free cash flow to growth ratio (0.9) looks somewhat attractive.
So while I agree with Tim that Apple poses a threat, I suspect he would also agree that Nokia remains cheap regardless. And so I urge you: Don't "think different." Think long-term. Think Nokia.
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