RealMoney Silver - Goodbye Moto, Hello Nokia

Goodbye Moto, Hello Nokia
By Stockpickr Guest Columnist
8/6/2007 11:03 AM EDT

Editor's note: This column was submitted by Stockpickr member Vitaliy Katsenelson, author of the contrarianedge.com blog.

It seems that Motorola (MOT) comes out with a good handset that everybody wants every five years or so. Considering that, we have a couple more years to go until the company will have another blockbuster handset again.

This failure by Motorola is a big positive for Nokia (NOK) on many fronts.

Or to piggyback on a well-known Motorola advertising tagline: Goodbye, Moto -- and hello, Nokia.

First, it shows that Nokia's management can execute despite not having the "hottest" phone on the market (i.e. Motorola's Razr). Also, it will be further taking market share from Motorola; I estimate its margins will further improve, driving its earnings north of $2 a share over the next couple of years. After seeing Nokia's second-quarter results, that estimate could come sooner rather than later.

The best part is Nokia doesn't have to do anything heroic to achieve that goal. Operational leverage (higher volumes spread over fixed costs) and a shift to a higher margin (more feature-rich phones) will do the work. This was the driver of the company's truly incredible operating performance in the second quarter.

The second quarter was simply spectacular: operating profit in every segment with the exception of its networks division grew in the high double digits, and sales climbed a whopping 28%.

At the current share price, you are not really paying for the network segment, in fact, since it loses money it detracts from the company's valuation. But at some point its profitability will turn positive and the division will become a contributor to Nokia's bottom line.

Samsung is a conglomerate, and although it's a good one, it still lacks Nokia's focus. Despite being located in a lower labor-cost part of the world, South Korea-based Samsung doesn't have a cost advantage against Nokia, as Finland-based Nokia manufactures its phones all over the world, including in China.

Nokia has proved to be the Dell of cell phones from a cost-structure and manufacturing-efficiency perspective and Apple-like when it comes to innovation -- it comes out with several dozen phones year after year.

There is still upside in Nokia's global market share, because Nokia has just a small market share in the U.S., accounting for only 4% of its volume. It is only a matter of time before Nokia starts taking market share in the U.S.; it has already started to design U.S.-centric phones. As Nokia regains market share in the U.S., this will drive its global market share.

Despite not having the phones in the U.S. that consumers seemed to want, Nokia still has an excellent brand reputation in the U.S., so it just needs to fix relationships with U.S. carriers (AT&T (T) , Verizon (VZ) and T-Mobile) and start selling phones that the rest of the world is so crazy about.

At the time of publication, Katsenelson and the firm for which he works were long Nokia, although positions may change at any time.

Katsenelson, is a CFA and a vice president/portfolio manager with Denver-based Investment Management Associates. His book, Active Value Investing, will be published by John Wiley & Sons in September 2007.

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