TechValue Rings up Nokia

05/13/2005 12:00 am EST


Mark Mowrey

Senior Analyst, Al Frank Asset Management

With a strategy that has proven so successful over the long term for The Prudent Speculator, the new TechValue Report from the team behind the Al Frank funds turns their growth and value skills to technology. Here, they ring up their latest buy.

"Especially when it comes to consumer devices, it’s far too easy to mix observations about design with viewpoints on technology. Importantly, regardless of the end design of a device (form factor and color, for instance), it is critical when assessing a company’s long-term viability to separate the underlying technology from its external execution. Case in point, this month’s Stock of the Month, Nokia (NOK NYSE). While we might believe that the company’s more recent phone designs are lame, Nokia continues to be a major driver of technological evolution.

"Given that view, and since the stock was so cheap, we added the company to Buckingham TechValue Portfolio last month. Nokia was formed in 1967 through the merger of Nokia Company, which was at the time a paper-making business, with Finnish Rubber Works and Finnish Cable Works. The first of its kind in the world, the Finnish NMT cellular mobile network went into service in the early-80s. Using pioneering work the company had done in radio telephones and data modems, Nokia made the first car phones for the new network.

"In the latter-part of the next decade, after Motorola introduced the highly successful Star-Tac phones, Nokia became the leader in useful, novel designs. But that leadership is gone. For some time now, Nokia has been disappointing us with behind-the-times, weakly designed (read super-boring) phones. They work—but there has been no spice. This has been especially true of phones developed for sale in the US. However, our prognosis on the company has recently improved. Average selling prices on phones were up, their product mix in terms of features and form factors was better and the company emerged as a leader in the sale of next generation handsets. As importantly, the company’s networks group, which makes the gear used to construct wireless networks, saw a 12% year-over-year revenue gain, driven by next generation equipment sales and expansion into newer markets. And at the time, the company’s outlook for the just-finished quarter was above expectations.

"There remain some annoyances, such as the company's continued focus on its N-Gage gaming platform which is not that good at gaming, and the fact that it faces vastly superior competition from Sony and Nintendo in the mobile gaming space. Even so, we are encouraged by the company’s forthrightness in admitting it has been behind the times and its willingness to adapt to changing tastes. Most importantly, our view of Nokia as an innovator remains intact, even if we’re unimpressed by most of its designs. And the lure of its inexpensively-valued stock (18 times trailing earnings), cash-rich balance sheet, meaningful dividend (about $0.43 per share in 2004), and intention to reel-in up to 10% of outstanding shares through a buyback program is nearly impossible to resist. Our current target prices on the shares are a Liquidity Goal of $34 and a Fundamental Goal of $28."

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