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Falling in Love With Nokia


Nokia is the Dell of cell phones when it comes to manufacturing and Apple when it comes to innovation.

I confessed of my love of Nokia (NOK) to the Financial Times and Minyanville readers in 2005. Nokia returned its love by delivering a very impressive performance. I'll let readers peruse through the numbers here, it's clear that Nokia's performance was very good this quarter. Mobile and Multimedia groups have performed very well; sales in the US have doubled in a year. The Enterprise group was the weakest link in the quarter – sales declined and losses widened. Nokia is going head to head with Research in Motion's (RIMM) Blackberry and Palm (PALM) in this segment.

I look at the enterprise segment's bad performance in the quarter from a glass-is-half-full perspective. Nokia has licensed "push technology" from Blackberry and is already rolling out new phones that are equipped with it. Just a couple of years ago, Nokia was bleeding money in the multimedia phone segment as it lacked compelling product offering and adequate scale. Today Nokia's multimedia phone margins are almost equal to its most profitable mobile phone segment. I believe enterprise will get fixed and will become profitable over the next couple of years, further helping Nokia's overall margins to get on track.

Valuation: My firm owns a boat-load of Nokia stock, however, we are not buying more of it at today's price as its margin of safety has been undermined by a significant price increase (a problem I love having). Nokia is trading at 20 times 2006 (yet to be revised up) estimates. However, Nokia is the perfect candidate for growth managers to fall in love with: pristine balance sheet with over 10 billion euros of net cash, great return on capital, both sales and earnings growing and at double digits with no end in site and of course, the best part: profit margins still have plenty of room to expand. And if all that was not enough, earnings estimates will be revised upwards.

Nokia is the Dell (DELL) of cell phones when it comes to manufacturing and Apple (AAPL) when it comes to innovation. It seems that it is putting its two year slump behind, introducing new exciting phones all over the world and embarking on the growth mode once again.
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Position in NOK

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