Handset Makers in for a Rough Six Months - TheStreet

Most mobile handset makers have endured a tough first half of 2008, but the worst may be yet to come as they continue to deal with a softening global economy that has consumers ratcheting back their spending.

Nokia

(NOK) - Get Report

,

Motorola

(MOT)

and

Sony Ericsson

have stumbled over the last six months.

"

The handset outlook continues to deteriorate," Brian Modoff, analyst with Deutsche Bank, wrote in a note. "We think consumers globally are stretching out their phone replacements, holding off on purchases to pay for gas or food or the mortgage." Modoff recently lowered his 2008 global unit estimate to 6.1% growth from his previous forecast of 8.1% growth.

That view would particularly hurt Nokia, which already saw the average sales price of its handsets, a key metric for analysts, fall sequentially last quarter. Nokia's mobile device volume in North America also sank by 49% sequentially, while European volume slid nearly 31%. Shipments of converged devices fell sequentially, as well, and the company's market share slipped to 39% from 40%.

"We are at a critical inflection point for smartphones," wrote Mark McKechnie, analyst for American Technology Research. "We believe Nokia must make the right moves at this juncture to protect its

39% market share and 20% operating margin for cell phones."

Nokia's shares, which have fallen more than 30% over the first half of the year to around $25, reflect these concerns.

The story is the same at Sony Ericsson, the Stockholm-based joint venture between

Ericsson

(ERIC) - Get Report

and

Sony

(SNE) - Get Report

, which said that the average selling price of its handsets was down both sequentially and year-on-year because of the impact of softer sales of high- to mid-end models.

T. Michael Walkley, a senior research analyst for Piper Jaffray, wrote that Sony Ericsson's market share could decline because of strong growth in the low-end market, where it has limited share. Additionally, there's a greater likelihood that Sony Ericsson will lose high-end share because of increasing smartphone competition from

Apple

(AAPL) - Get Report

,

Research In Motion

(RIMM)

and

Palm

(PALM)

.

Walkley also pared his global mobile unit growth outlook, although he is slightly more optimistic than Deutsche Bank's Modoff. Walkley wrote that he has reduced his global 2008 handset unit growth forecasts to 10.1% from 11.5%, "due to our monthly channel checks indicating soft sell-through trends in North America combined with our belief the China handset market could have slower sales before the Olympics."

It's particularly troubling for Motorola's sales to drop in North America, where nearly half of its handset unit sales take place. Motorola's issues are compounded by plans to separate its handset division from the rest of the company, no doubt a distraction for a management team that continues to manage a weak product portfolio.

All of this comes as Motorola continues to struggle with handset sales. During its last quarterly earnings report, the company said mobile-device sales slid 39% from a year ago, knocking its market share of handsets down to just 9.5%. Motorola said the number of units shipped tumbled 33% sequentially to 27.4 million.

"While Motorola's North American share remains well above its global share, our checks indicate Motorola continues to lose sell-through market share," writes Walkley. "Our checks indicated declining Motorola sell-through trends at all four major North American carriers. Given our expectations of weak mobile device results resulting in lower cash levels, we believe a spin-off of this division is unlikely in the near

future."

Much like Nokia, Motorola's woes are clear by looking at the slide in its stock price. Shares have plummeted more than 52% in 2008.

Amid its troubled peers,

Qualcomm

(QCOM) - Get Report

has been showing signs of life. The company recently raised guidance for its fiscal third quarter and full-year 2008, citing strong fundamental drivers of its business. Additionally, the telecom reshuffling in China is expected to benefit Qualcomm, as the company's CDMA and WCDMA devices will function on new 3G networks being built out in the country.

Qualcomm also estimates that shipments of its devices should reach approximately 107 million in the fiscal third quarter, with an estimated average selling price of approximately $226 per unit. With approximately 86 million CDMA devices shipped in the year-ago quarter, Qualcomm's forecast represents a nearly 25% increase in CDMA device shipments. Also on the positive side, an average selling price of $226 per unit would be the highest for the company since the fiscal third quarter of 2005.

Of course, not all the news is positive for Qualcomm. Even if Qualcomm does ship 107 million devices in the fiscal third quarter, that figure would represent a 4% decline sequentially. Historically, Qualcomm has shown weakness in the March quarter, with sequential declines in the last three years.

Still, shares of Qualcomm are higher on the year, which is a sharp contrast to its rivals. The stock has climbed 21% over the previous six months to above $47. Much like its counterparts, Qualcomm is set to report earnings near the end of July, but the next catalyst for the stock could come on July 23, when the Delaware court hears the royalty case between Nokia and Qualcomm.

"We believe Qualcomm is an excellent play on the 3G smart-phone ramp," McKechnie wrote. "Qualcomm's stock has two main drivers: business fundamentals and legal/royalty battles. We believe business fundamentals alone support current valuations. Indeed, the company is earning over $2 per share without receiving royalties from Nokia, the top global handset player."