Monday, September 18, 2006

Weakness in Nokia

The last week or two have seen Nokia (NOK) share prices weaken. This is notable in the face of a generally positive market. Let’s find out why, and what we should do about it! You can go here to see links to initial analysis and supplemental updates on NOK.

Why has Nokia stock been dropping, the Background

The trouble started a week ago when Elcoteq (ELQAV.HZ) issued a profit warning based on “reduced customer demand”. Elcoteq makes 20% of the handsets Nokia outsources. A reduction here implies lower orders in Europe for Nokia or a shift in handset construction strategy.

This week CSR corp (CSR.LN) issued a similar warning: customer component orders are down so it will miss profit forecasts. Thirty five to forty percent of CSR’s sales are into Nokia. Then today a handset cover maker called Perlor issued a profit warning as well – and of course their biggest customer is Nokia as well.

So reading these press releases seems to make it clear that Nokia is ordering fewer parts and phones produced than had been previously projected.

The Analysis

One thing to keep in mind is that NOK recently changed leadership. New CEOs do like to set strategy.

All these companies are European, for one thing, which could indicate a local weakness or change in strategy. Most of Nokia’s growth potential is outside of Europe.

More importantly: these companies are still projecting growth, they are just throttling back their growth rate expectations. This implies that Nokia is perhaps just moderating their production rates in the mature European market.

What moves to make now

A present value analysis of Nokia tells us that even a moderate growth rate from Nokia still represents a good price, and present expectations are for fairly high growth driven primarily by Asia. If Europe just holds at present sales levels, Nokia should still see sufficient growth from Asia and perhaps the Americas to drive 7% sales growth.

For the long term investors out there this is plenty to justify a good value and the dividend yield is high enough that you get well paid to wait.

For the short term, however, don’t be surprised if Nokia sees significant weakness. Nokia may lower growth projections and the market will further punish current holders.

I’m going to remove NOK from the BUY list at right and list it as a long term holding on the Archived Buy list. I’m not going to exit Nokia investing because I can afford to wait years to collect, but I may insure it with options or otherwise try to profit based on volatility that is likely to come up during the next 3 months.

I wouldn't blame you if you sell it, there will probably be buying opportunities coming up, but the company still seems pretty solid.

Invest well,

FW
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