Wireless shares got a jolt from a pair of bullish research notes signaling a strong turnaround for the sector in 2003 and 2004. Merrill Lynch European wireless-equipment analyst Adnaan Ahmad upgraded Nokia ( NOK) stock to buy from neutral, because of expected good news from a strategy meeting during the next two days. Ahmad said he thinks handsets will fly off store shelves in the next couple years, because of high demand for replacement handsets, aided by substantial discounts from wireless carriers worldwide. The growth will be driven mostly by European consumers, he said. Separately, Morgan Stanley raised its outlook on the U.S. wireless services sector, saying that several of the big six carriers, including Nextel ( NXTL) and AT&T Wireless ( AWE), will report positive earnings and free cash flow by next year. Nokia's American depositary receipts jumped 67 cents, or 3.5%, to $19.88. Motorola ( MOT) shares gained 77 cents, or 6.8%, to $12. AT&T Wireless shares gained 67 cents, or 8.9%, to $8.22. Shares of Sprint PCS ( PCS) jumped 55 cents, or 9.5%, to $6.30. Nextel shares added 60 cents, or 4.4%, to $14.35, inching close to their 52-week high of $14.67. In early morning trading, Nextel broke past its 52-week high, but it settled back behind the threshold by midmorning. The analysts' comments come hours before Nokia kicks off an investor strategy meeting in Dallas. Though major news isn't expected from the meeting, industry watchers say the company may provide more insight on its strategy to infiltrate the Code Division Multiple Access, or CDMA, market, which has been a historically weak area for the company. CDMA is the predominant standard in the U.S. and is used by leading operator Verizon Wireless and Sprint PCS. The company is unlikely to revise earnings estimates this week, as it is scheduled to conduct a midquarter financial update next Tuesday.
Since the middle of the year, Nokia has banked its near-term fortunes on handset replacement sales. In the absence of strong wireless subscriber growth, with cell-phone penetration in the U.S. stuck around 50%, Nokia has been telling investors that it will meet reduced sales and shipment targets because consumers will be inspired to replace their two-year-old handsets. New handsets have color screens, built-in cameras and the ability to access high-speed wireless data networks. But until now, little data have been provided to back up Nokia's assertions. Merrill Lynch said Monday that the consumers who bought phones in 1999 and 2000 are now due to replace their handsets. By its own calculation, current phone subscribers will feel the need to dump aging gadgets for newer ones, a trend that will drive industrywide phone shipments to top 474 million next year, from a projected market volume of 400 million this year, reflecting an unusually high 18.5% growth. By 2004, Merrill projects phone volume across all the major manufacturers will reach 501 million units. "Have we gone mad?" wrote Merrill's Ahmad in a morning note. "We don't think so. As the market, with its 'bull' glasses on in 2000, completely overestimated the size of the handset market in 2001 and 2002, we believe the reverse has occurred in 2002." The industrywide consensus for 2003 remains at 435 million units by 2003, and 463 million units by 2004. Nokia executives have said in the past that the industry has room to grow about 10% in 2003 to 440 million units. Merrill also lifted Nokia's 2003 earnings per share target by 41% to 1.02 euros ($1.01) from 73 euro cents. In 2004, the firm projects EPS will reach 1.06 euros, from an earlier target of 73 euro cents.