The mobile industry’s main annual shindig, the Mobile World Congress, took place in Barcelona last month. Two interesting stories were missed by the mainstream press. Firstly, after years battling each other in court, Qualcomm, the world’s biggest mobile-chip designer, teamed up with Nokia, the top handset maker, to crack the US smartphone market. Secondly, China Mobile, the world’s largest network operator, offered to pay experts such as Nokia to solve the crippling connectivity problems that threaten its expansion into 3G mobility.
Nokia (Helsinki:NOK), rated OVERWEIGHT by HSBC
I mention this because it underscores how hard it is to offer truly mobile broadband with which users can, for example, surf the web at speeds of 5MB/sec while on a train travelling at 100mph. If a giant like China Mobile can’t crack this nut, it means there are significant barriers to entry. But with Qualcomm and Nokia now joining forces, even the likes of Microsoft will have to play catch up.
This is important because the smartphone segment makes the highest profit margins. In 2009, it’s expected to grow by 6%-11%, compared to a 10% fall for the industry as a whole. By 2013, Juniper Research predicts sales will rocket by 95%. No wonder the likes of Apple, Google and Research-in-Motion are all muscling in. Yet Nokia has probably the most exciting slate of next-generation devices. This should reassert its dominance and beef up its relatively weak position in North America. And it may just help its share price, which is now at ten-year lows.
During the recession the group will continue to make the most of its size. Nokia is the lowest-cost producer and about the same size as the next four-largest suppliers combined. This scale advantage is vital: as consumers delay new purchases, Nokia should stay profitable, unlike many of its rivals. Analysts expect 2009 sales and underlying earnings per share of e44bn and e0.77 respectively, rising to €45bn and €0.95 in 2010.
That puts the shares on undemanding p/es of 10.4 and 8.5. The group had net cash of e1.4bn at December 2008, providing scope to hike the 3% dividend yield. When earnings visibility is poor, though, a better valuation measure is normalised profits across the economic cycle. I believe Nokia can consistently deliver EPS of e1, so I would value the stock at around €12. Of course, its rivals won’t rest on their laurels. But the fact that billions of people globally are still without fixed-line internet access or high-speed wireless connectivity is a huge opportunity and should mean a sustained period of good returns for all key players. Other risks include falling prices, tough competition in Nokia’s infrastructure unit and fluctuating currencies. First-quarter results are out on 16 April.
Recommendation: BUY at €8.05
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments