Look at Nokia NOK

Nokia needs no introduction. What you may not know about this Finnish giant:

Bull Case:

1. 40% of the market share of the global mobile pie is owned by NOK
2. Market Cap $60 B: world wide scale, distribution channels and manufacturing base give it at least a narrow economic moat
3. lowest cost supplier due to scale-- as cell phones become less of a brand and more of a commodity (think Dell's success 10 years or so ago with PC's), this gives NOK a boost
4. NOK has 32% of the global smartphone market share, contrary to general perception, and in the dismal Q4 just reported there was a 20% increase in smartphone sales revenue
   
5. #1 brand in India and China with a strong marketing base there and the strongest expansion potential (50-80% of consumers have cells already in developed nations, <>
6. Historically, NOK has been a free cash generating machine: FCF yield 10%+, operating cash flow averages 7 B euros/yr with a capex of only 14% that amount.
7. NOK has it's own "iPhone killers" models in the pipeline (and some in production in Europe) that will almost certainly favourably compete with Apple's products, particularly with respect to pricing.
8. NOK is planning to open source their phones operating system allowing 3rd parties to use the OS royalty free to develop apps for the phone consumers. This should make NOK's products more appealing v.s. many of the competition particularly due to NOK's massive scale.
9. A historic shareholder wealth builder with ROICs exceeding 50% for past 3 years!
   
10. the share price is at levels not seen since 2004 and at one of the best valuations since 2001.
11. a 6% dividend yield that is likely sustainable (30% payout ratio) helps ease the pain of waiting for the market turnaround.... that could take years!
12. NOK is a net guru choice: (from gurufocus.com) Charles Brandes bought 2,074,063 shares in the quarter that ended on 09/30/2008. David Williams owns 5,400,000 shares as of 09/30/2008, an increase of 12.5% from the previous quarter. Chris Davis owns 32,940 shares as of 09/30/2008, a decrease of 20.36% of from the previous quarter. George Soros and Richard Perry both sold out their holdings in the quarter that ended on 09/30/2008.
13. DCF analysis accounting for assumptions of margin compression and increasing cost of capital estimate a FMV in the mid 20's per share.
    

As always, one needs to try to kill the investment by presenting the Bear argument:

1. although NOK currently has 7B euros in cash and no long term debt (oops, I'm in the Bear section, aren't I?) most of that will vaporize with the NAVTEK acquisition (NAVTEK is a digital mapper for pedestrians bought by NOK at a much higher market price than it would command today)
2. RIM and AAPL have impressive products in the most rapidly growing segment (smartphones). Although they have only a small amount of the market share globally (17% and 5% respectively), they are much more dominant in North America than Nokia.
3. NOK's margins are eroding (due to competition and emphasis on lower margin sub 30 euro phones in emerging nations) to about 7% from 14% in Q3
4. NOK often grows by making acquisitions which are always subject to execution risk.

Here's a few more subjective concerns I have. Nokia is in an industry sector that is rapidly changing, "not boring" and clearly making the transition from brand to commodity. It is hardly out of the mainstream with 25+ analysts following. I don't believe I can out think all of them, can you? A narrow moat may soon be breached by an up and comer and usually is.

With all that said, if NOK was cheap enough to provide a very large MOS.... say $10/share, I'd be interested. Perhaps I'm too conservative. In this market environment, it seems that being an extreme cheapskate pays off.

I'll continue to watch and learn.

l






Appendix for detail freaks like me:



Valuation Metrics (from Morningstar)

	Stock	Industry	S&P 500	Stock's 5Yr Average*
Price/Earnings	7.8	9.3	12.4	14.5
Price/Book	3.0	1.9	3.0	5.1
Price/Sales	0.8	0.9	1.7	1.7
Price/Cash Flow	6.6	8.1	8.9	12.2
Dividend Yield %	5.7	0.6	3.1	---

Annual Rates (per share) 10 yrs 5 yrs 12 months
Revenue Growth (%) 16.6 25.5 25.8
EBITDA Growth (%) 12.1 15.2 41.2
Free Cash Flow Growth (%) 18.8 12.1 48.2
Book Value Growth (%) 14.4 6.2 23.1


Important Key Ratios:

Fiscal Period	Dec98	Dec99	Dec00	Dec01	Dec02	Dec03	Dec04	Dec05	Dec06	Dec07	Latest Q.	Sep07	Dec07	Mar08	Jun08	Sep08
Return on Equity (%)	34.30	34.90	36.40	18.00	23.70	23.70	22.50	29.70	36.00	48.80	32.00	47.60	52.50	33.80	36.90	32.00
Return on Assets (%)	17.40	18.00	19.80	3.30	12.00	14.20	14.70	16.30	19.60	23.40	10.80	18.40	20.50	11.10	10.00	10.80
Return on Capital* (%)	14.80	15.80	18.40	9.00	13.30	13.20	12.90	14.20	16.70	16.60	11.20	16.70	17.90	12.10	11.30	11.20
Debt to Equity (%)	6.20	3.70	2.00	1.70	--	0.60	--	--	--	--	--	--	--	--	--	--
Debt to Revenue (%)	2.40	1.40	0.70	0.70	--	0.30	--	--	--	--	--	--	--	--	--	--
Gross Margin (%)	18.80	20.10	19.50	13.70	18.10	17.30	15.10	13.40	13.40	11.90	12.50	13.70	15.00	14.30	12.90	12.50
Net Margin (%)	13.10	13.00	13.00	7.10	11.30	12.20	11.00	10.60	10.50	14.10	8.90	12.10	11.70	9.70	8.40	8.90