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HELSINKI - Nokia has outsold rival mobile phone makers for the last five years but its stock has effectively not moved a bit since 2002, leaving investors and analysts hoping it will pull away this year.
The shares are lingering around 15 euros, the level where they were
six years ago when the technology bubble burst.
That is despite a forecast 62 per cent increase in earnings per share to 1.15 euros in 2007, from 0.71 euros in 2002, according to a Reuters poll of analysts.
The explanation for this apparent paradox is that investors are not looking at earnings per share, which are powered by share buybacks, but at Nokia's inability to turn booming demand for its phones -- 1.15 billion sold over the past five years -- into an attractive profit.
While its sales of mobile phones have grown by over 150 per cent in those five years, Nokia's revenues grew by a much more modest 31 per cent and net profit by just 23 per cent.
Not only did the Finnish company sell ever cheaper phones, it also made less profit on those cheaper models.
"Nokia has been unable to convince investors that it can make the same margin on a cheap phone as it can on a more expensive phone. As soon as they can do that, their problems are over," said Theo Maas, a fund manager at ABN AMRO Asset Management, who helps oversee over 30 billion euros in assets.
That moment may well be near, other investors say.
"A marginal improvement in Nokia's business can have a big impact. If they show an improvement in the mid-end of their phone range, there's a lot of upside to be made," said Jan Keuppens, a fund manager at Dutch-based Robeco, who helps oversee 8.5 billion euros in assets, including Nokia stock.
"I don't expect any fireworks at short notice. But some time in 2007 I expect an improvement."
By any yardstick, shares in Nokia -- Europe's number one technology firm with a 61.4 billion euros market capitalisation -- look cheap.
In 2002 and 2003, Nokia shares traded at roughly 20 times expected earnings, but since then the valuation has fallen and the stock now trades just 13.4 times forecast 2007 earnings, well below its rivals.
Nokia's closest rival, Motorola, trades at 15 times expected 2007 earnings, according to Reuters Estimates, even though profit margins in its key handset unit more than halved to 4.4 per cent in the Christmas-fuelled fourth quarter, compared with Nokia's much higher 13 per cent margin.
"When calculating relative valuations it is clear the stock is not expensive," said eQ analyst Jari Honko.
His sell-side colleagues try persuade investors to buy the bombed out stock. Out of 65 sell-side analysts covering the stock, only nine suggest investors should reduce or sell their Nokia holdings, while 19 recommend hold and 37 accumulate or buy.
"The phone market is growing. Nokia has gained market share and it has become increasingly evident that the market is being split between fewer players. Also Nokia's profitability is still at a good level," said OKO Bank analyst Hannu Rauhala in Helsinki.
Investors are now waiting for the first signs that Nokia is taking back market share among mid-priced phones.
Nokia held on to its global market share of about 35 per cent in the last quarter due to its success with affordable phones for emerging markets like India.
It has launched new, slimmer mid-priced phones over the last year but the market wants a wider, more competitive range.
The company has lost ground even on its European home base to Samsung, Motorola and Sony Ericsson, with their thin, folding models as well as advanced music and camera phones.
Nokia itself points to its global brand, its scale advantage and its superior logistics.
"More than 850 million people have a Nokia mobile phone in their hands. No other consumer electronics company in the world has ever had such a customer base," Nokia Chief Executive Olli-Pekka Kallasvuo said earlier this month.
Some investors, however, do not like this voluntary association with the consumer electronics industry, because operating profit margins at the consumer electronics units of the Sony, Philips, Samsung and Panasonic and others are 5 to 6 per cent at the best of times, and usually well below that.
"An investor can be justified when arguing: well, Nokia's margin is steadily declining and, by the way, it is still too high for a consumer electronics firm," Maas said.
Nokia's operating profit margin is expected to fall to 12.8 per cent in the fourth quarter from 13.2 per cent a year earlier.
- REUTERS