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In today's Motley Fool Take:

Can Wal-Mart Be Stopped?

Grocery store chains, rural traditionalists, and mom-and-pop shops weren't able to stunt Wal-Mart's(NYSE: WMT) growth the way a simple piece of paper has. By prohibiting establishments with more than 100,000 square feet of selling space to derive more than 10% of sales from non-taxable merchandise, Alameda County's Large Scale Retail Ordinance effectively prevents Wal-Mart from opening a Supercenter in the California county.

The Supercenter concept relies on cheap groceries and prescription refills to keep shoppers coming back. That won't fly in Alameda County. The county's Board of Supervisors approved the ordinance -- which might as well be labeled "Keep Wal-Mart Supercenter Out" -- earlier this month. Last night, Wal-Mart filed a petition to have the ordinance overturned.

If grocers with operations in California, including Kroger(NYSE: KR), Safeway(NYSE: SWY), and Albertson's(NYSE: ABS) are applauding the move, they are doing so quietly. All three chains are trying to mop up their own reputations in the aftermath of their recent union disputes.

It's easy to hate Wal-Mart. We have a built-in instinct to root for the underdog. Wal-Mart is no underdog. Yet, the world's leading retailer makes a convincing case when it points out that the typical Supercenter will collect $4.5 million a year in sales-tax revenue, to say nothing of its own property tax tab.

Wal-Mart argues that it is ultimately the community that should decide whether it patronizes a store. Providing lower prices on groceries allows customers to have more disposable income to spend locally.

That sounds reasonable, so long as you are not predisposed to vilifying Wal-Mart. After all, if you're in the mood to launch a verbal Molotov Cocktail, just belt out a "Hey, that Wal-Mart sure is something, isn't it?" at a union function. Non-unionized Wal-Mart made enemies on the way up, and where you stand when it comes to Wal-Mart may very well come down to where you stand on organized labor.

Either way, if Wal-Mart's petition fails, it doesn't mean that Alameda is in the clear. I can almost picture the press conference now: "Ladies and gentlemen of Alameda, I now present you the prototype 99,000 square-foot Supercenter. Shop on!"

Discussion Board of the Day: Wal-Mart

Is Wal-Mart burying competitors unfairly, or is survival of the fittest in the best interest of the consumer? Will others follow Alameda's lead? Did Safeway and area unions really play a part in pushing the controversial ordinance? All this and more -- in the Wal-Mart discussion board. Only on

EarthLink's Balancing Act

EarthLink (Nasdaq: ELNK) may have reversed its loss from the fourth quarter of last year, but the coming year should be a pivotal one. Despite the good news on subscriber growth and cost control efforts driving profitability, the stock lost about 8% in early morning trading.

The company -- the third-largest ISP, behind Time Warner's(NYSE: TWX) AOL and Microsoft's(Nasdaq: MSFT) MSN -- reported net income of $10.7 million, or $0.07 per share, as compared to a net loss of $36.9 million, or $0.24 per share, in the same quarter of last year. These numbers include a $19.4 million charge related to its recent closure of call centers, as well as acquisition-related amortization.

However, the good news was continued growth in subscribership. In the quarter, broadband customers increased by 36% (and this year, it surpassed the 1 million benchmark), while narrowband customers decreased by 11%.

Adding 248,000 subscribers in the last quarter, EarthLink boasts a total of 5.2 million subscribers, a 4.4% increase from the year before. However, the churn rate increased to 4.1% for the quarter, from its 3.6% rate during the same period last year.

What's to come? The price of broadband is approaching the old going rate for plodding dial-up, driving the latter to become a bargain commodity served by services such as United Online(Nasdaq: UNTD) and now even AOL's new discount deal under the Netscape name.

Meanwhile, the once-mighty AOL's "Internet for newbies" seems downright silly in an age where everyone and their grandpa Googles. Add to that, in its conference call (courtesy of CCBN StreetEvents), the company cited regions where SBC(NYSE: SBC) and Verizon(NYSE: VZ) offer DSL as regions of intense competition.

While EarthLink said it anticipates adding between 250,000 and 550,000 paying subscribers to the fold in 2004, it expects revenues will grow at a slower rate than subscribers during the year. The company gave guidance of 2004 revenues of $1.41 billion to $1.44 billion, shy of the previous estimate of $1.46 billion.

A Foolish reader recently brought up an interesting theory -- that EarthLink's recent move to shed workers might indicate to some cleaning up for an acquisition. A move of that nature still seems a bit far off, but the next year should be crucial in assessing the company's fortunes. Consolidation in the industry doesn't seem completely off-base, given the fierce competition from both telecom companies and cable concerns.

Offering high-speed on one hand and dial-up service on the other, EarthLink's got quite a balancing act, as it tries to increase its broadband customers before being too undercut by the bargain-bin ISPs. It should be an interesting year.

Quote of Note

"Debt is the worst poverty." -- Thomas Fuller

Nokia's Enterprising Value

By Chris Mallon

Nokia (NYSE: NOK) shares were up almost 12% in 2003, and for investors who held tight as the stock underperformed the market, the first few weeks of 2004 were like vindication, rewarding them for their patience with a 24% gain.

(Note: In the following analysis, I've translated Nokia's 2003 results into U.S. dollars at the Dec. 31, 2003 exchange rate of $1.2552/1.0 euro.)

Expectations are high, and last week the company reported 2003 earnings per share of 0.75 euro ($0.94), up 6% over 2002. At $21.00 a share, Nokia sports a market cap of $98.7 billion, and trades for 22 times prior-year earnings. All of which makes me wonder if the stock isn't a bit overvalued following its recent runup.

I know better than to trust the P/E ratio as a final arbiter of value, and I prefer to use cash-based measures to determine value. My favorite method is the enterprise value-to-free cash flow (EV/FCF) analysis, because it brings in two important elements missed by the P/E ratio: cash flow and debt.

Nokia generated free cash flow of $6 billion in 2003, up 7.1%, and finished the year with $14.2 billion in cash and equivalents. That's $1.28 and $3.02 per share, respectively. Total short- and long-term interest-bearing debt was $616 million, or $0.13 per share, for a debt-to-equity ratio of 0.04. Crunching the numbers gives us an enterprise value of $85.1 billion, or $18.11 per share. This puts Nokia's enterprise value at around 14.1 times free cash flow.

Running through the same process with one of Nokia's largest competitors, Motorola(NYSE: MOT), gives us a reasonable comparison. Motorola's 2003 financial statements list short- and long-term debt of $7.6 billion, cash and equivalents of $7.9 billion, and $2.1 billion in free cash flow. At $17 per share, its enterprise value of $39.3 billion is 18.7 times 2003 free cash flow.

The conclusion? It appears Nokia represents better value than its closest competitor, with a much stronger balance sheet and a sizable market share lead that's expected to increase again this year. However, with an EV/FCF multiple twice the free cash growth rate, management has to get cash flow growing faster if it hopes to see higher stock prices.

Chris Mallon owns shares of Nokia through his private investment partnership.

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