Nokia to remain the market leader … helped by Emerging Market expansion

nokiaNokia the worlds biggest manufacturer of mobile devices , still enjoys a 40% global market share, dwarfing it’s nearest competition; Motorola (NYSE : MOT), Sony-Ericsson, Samsung, & LG. The company is particularly strong on an international basis, with top market share in practilally all markets served. More importantly, from a MyStockVoice perspective, 80% of sales come from outside the US. With recent advances in 3G licensing in Asia, notably Vietnam, India & China, Nokia (NYSE : NOK) looks well set to come out as the real winner from the mobile broadband explosion.

The company’s scale allows it to produce what is now regarded as a commodity product (low-end cell phones) at a much cheaper prices than it’s competitors. Nokia’s dominace in the mobile handset market sees it  earning roughly 15% profit even on entry-level units, while it’s most profitable competitor, Samsung, reputedly earns slightly above 13%.

Nokia is also working on growing it’s service offerings, expanding into music & games, whilst adding compatible location based services (LBS)with the recent acquisition of NAVTEQ. The strategy being that Nokia can earn incremental revenue from these services whilst building brand loyalty/customer lock-in, as users become accustomed to Nokia’s services & will opt to replace their existing handset & existing services with another Nokia model instead of migrating to a competitor.

From a financial point of view, Nokia holds an enviable position. The current balance sheet shows €5.5 billion against about €4.4 billion in debt, 70% of which is in short term notes.  Return on capital is pretty impressive to date, since 2004, ROIC is over 160%, & standard return on capital is equally impressive at 75%. Operating margins run at circa 13%, with free cash flow at 9%. For the long term investor, Nokia also has a track record of delivering a dividend yield of close to 4%. That said, the dividend rate was cut by 20% in January to reflect the impact of the gloabl downturn.

Nokia is clearly facing some major competition in the high end “smartphone” category, which is judged to be the fastest growing sub-sector of the market. While Nokia is still the world’s biggest smartphone maker, competitors Apple (Nasdaq : AAPL) with the iPhone & Research in Motion (Nasdaq : RIMM) with its Blackberry range have both  quickly gained market share , whilst Asian manufacturers such as HTC are also proving to be a thorn in the flesh.

My take is that if Nokia can crack some key markets in SE Asia, India & China, they will be able to surpass their upstart rivals, although in China, native handset makers will obviously have a first pass; e.g. TD-SCDMA with China Mobile . Nokia has a long track record with Vodafone, Orange & Telefonica, all of whom are increasingly active in Emerging Markets. With a retrospective look at the last quarters results & with the current overly sold price, I am looking at Nokia as a winner, 6 moth personal target price of $18.50 on the ADR

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2 responses to this post.

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