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No. of Recommendations: 2
Warning ... Long Post Ahead!

Panhale's recent Rule Maker Ranker posts on Nokia 
reminded me that I had also done one on them for third
quarter and had neglected to post it.  I also used the
same competitors that he had used on his second post
(MOT and QCOM).  I would liked to have used ERICY as 
well, but the format of their quarterly results makes
it almost impossible to translate into our spreadsheet.
I guess we just have to wait for the annual numbers to
add them to the mix.  Now on with the numbers:

Financial AnalysiCompany Being Evaluated                        Competitor #1  Competitor #2 Competitor #3

                     Nokia                                        Qualcomm        Motorola
                     (NOK)                                         (QCOM)          (MOT)
                 Current PeriodYear-ago PerioYear-over-Year    Current Period  Current PeriodCurrent Period
                      99Q3          98Q3         Growth             99Q4            99Q3         <Date>
Income Statement . . .
  Sales                  5,223         3,500      49.2%                  1,060         7,688
  Cost of Goods S        3,282         2,122      54.7%                    621         4,601
  Net Income               662           481      37.5%                    136            91
  Shares Outstand        1,185         1,176      0.8%

Balance Sheet . . .
  Cash & Equivale        3,455         2,342      47.6%                  1,614         3,527
  Current Assets         9,963         6,860      45.2%                  2,978        16,015
  Short-term Debt          469           521     -10.0%                    115         1,495
  Current Liabili        6,059         4,024      50.6%                    876        11,898
  Long-term Debt           285           174      63.7%                      1         3,598
                                                                              1             1             0
Margins & Ratios . . .                                                                                     Competitors' Average
  Gross Margins           37.2%         39.4%     -2.2                    41.4%         40.2%                   40.8%
  Net Margins             12.7%         13.7%     -1.1                    12.8%          1.2%                    7.0%
  Cash-to-Debt             4.58          3.37     36.0%                   13.91          0.69                    0.99
  Net Cash               2701.4        1646.8     64.0%                  1498.0       -1566.0                   -34.0
  Fool Flow Ratio          1.16          1.29     -9.7%                    1.79          1.20                    1.50


                 Continue Here

Ranking Rule Makers

1) Brand          Points (0-1)                                3) Financial Dire Points (0-3)
Familiarity                   1                               Sales Growth                  3
Openness                      1                               Gross Margins                 1
Optimism                      1                               Net Margins                   1
Legitimacy                    1                               Shares Outstandin             2
Inevitability                 1                               Cash-to-Debt                  2
Solitariness                  0                               Fool Flow Ratio               2
Humor                         1                               Expansion Potenti             3
  Subtotal                    6                                 Subtotal                   14

2) Financial Loca Points (0-2)                                4) Monopoly Statu Points (0-4)
Mass Market Habit             0                               Gross Margins                 0
Gross Margins                 0                               Net Margins                   4
Net Margins                   2                               Net Cash                      4
Cash-to-Debt                  2                               Fool Flow Ratio               2
Fool Flow Ratio               1                               Convenience                   2
Your Interest                 2                                 Subtotal                   12
  Subtotal                    7
                                                              5) Your  Enjoymen             1

                   Total Score             40  Second Tier


Nokia loses points in my analysis in the following 
areas:

1)  Solitariness - With competitors such as Qualcomm,
Ericsson, and Motorola, I honestly can't say that Nokia
is the clear-cut category king.  

2)  Mass Market Habit - I just can't see someone buying
new cell phone equipment once a year or even more 
frequently.  I'm sure there are some that do, but I 
don't think this represents the vast majority of their
market.

3)  Gross and Net Margin trend - Both figures slightly
declined from the figures they posted in 98Q3.  When
comparing the numbers from 99Q3 to those for the first 
nine months of 1999, the decline doesn't look quite as 
severe (38.2% to 37.2% for gross margins, 12.9% to
12.7% for net margins), but it still represents a 
disturbing trend.  Is this a one quarter hiccup, or a 
warning of things yet to come?  Stay tuned.

4)  Margins vs. Competitors - While Nokia's margins 
have slipped slightly, those of its competitors have
been on the rise.  Qualcomm numbers are climbing quite
nicely as a result of its CDMA licensing revenues, 
which represent 90% of the company's profits in the 
most recent quarter.  I fully expect this trend to 
continue for QCOM.  I'm no expert on Motorola, but I
was surprised at the improvement in their financials
from my last analysis at the end of 1998.  If their
competitors continue to post numbers like these, I 
believe NOK will have a tough time earning points in 
this category.

5)  Convenience vs. Competitors - Just as in the 
Branding category, I have a hard time saying that NOK
is the best in its industry.  Therefore, I can't give
it more than two points here.

Now before I give everyone the idea that I am "bearish"
on Nokia, I must admit that I am a big fan of this 
company and a current participant in their DRP.  I 
believe that their position in the DSL arena as an 
equipment supplier should really begin to start paying
HUGE dividends in the next few years as people begin
moving away from standard dial-up access to broadband. 
For more information on their position in this growing
market, check out the following link:

http://www.dsl.nokia.com/press.htm

Something tells me that the numbers for NOK will 
improve before the next earnings release, plus the 
inclusion of ERICY as a competitor should help their
overall score as well.  In any event, I plan on 
keeping a close watch on this company in the near 
future.

Fool On!

the LanceMan
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/* 1) Solitariness - With competitors such as Qualcomm,
Ericsson, and Motorola, I honestly can't say that Nokia
is the clear-cut category king. */

Why then does Cisco get a point for solitariness with much more threatening competitors, Lucent and Nortel? If Nokia does notmeet your standard for leader today, it certainly will soon. And Qualcomm isn't going to be a competitor to nok for long.

/*3) Gross and Net Margin trend - Both figures slightly
declined from the figures they posted in 98Q3. When
comparing the numbers from 99Q3 to those for the first
nine months of 1999, the decline doesn't look quite as
severe (38.2% to 37.2% for gross margins, 12.9% to
12.7% for net margins), but it still represents a
disturbing trend. Is this a one quarter hiccup, or a
warning of things yet to come? Stay tuned. */

Maybe they are accepting lower margins in order to get huge revenue growth a la Cisco. Look at how well Cisco has done recently.

/* 5) Convenience vs. Competitors - Just as in the
Branding category, I have a hard time saying that NOK
is the best in its industry. Therefore, I can't give
it more than two points here. */

Then nok really should have gotten a 39, in order to get 2 points for interest you have to be a user of their products. Isn't it more convenient to have a phone that works well and doesn't break down?


/* Now before I give everyone the idea that I am "bearish"
on Nokia, I must admit that I am a big fan of this
company and a current participant in their DRP. I
believe that their position in the DSL arena as an
equipment supplier should really begin to start paying
HUGE dividends in the next few years as people begin
moving away from standard dial-up access to broadband.
*/

Well if this is your only reason for investing in Nok, I think you should sell. There are better dsl plays than Nokia.
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No. of Recommendations: 0
As always the LanceMan makes it look easy. I have a concern though, how can we have two analysis of NOK with a 10 point spread. The spreadsheet should not allow so many arbitrary points to be called, or we have a tool that is subject to manipulation. I would appreciate any responses to this.

Regarding some of your items (disclosure; I own MOT and unfortunately not NOK). 1) Solitariness, I'm afraid that NOK is pretty much the king of the hill (it hurts to finally admit this). 2) I agree with you on Mass Market Habit, at this time. 3) Gross and Net Margin Trend is a concern, not a "disturbing trend", or we would have to get rid of half our RMs. 4) Margins vs. Competitors, regarding MOT if things had gotten any worse than 1998, Chapter 11 would have been in order, so they can pretend to look good now. How they got where they were is another question. QCOM has potential as a Rule Breaker, but it is not a Rule Maker. The current 2G CDMA will not continue to be significant, the whole world is watching 3G. This will make or break QCOM, it will not make or break NOK. 5) Convenience vs. Competitors, again this hurts me more than it does you, but I think you're wrong. NOK continues to slay all the other players, I wish it weren't so, but it is.

I think NOK might be a Rule Maker. If I'm wrong. showme
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2) Mass Market Habit - I just can't see someone buying new cell phone equipment once a year or even more frequently. I'm sure there are some that do, but I don't think this represents the vast majority of their market.

I seem to recall that the average churn rate for mobile phones was about 18 months. Can anyone confirm?

-Rubic
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Dont know about the churn rate for phones but it sounds, based on my unscientific recollections, about right or even high. For any of the handset industry the big task is to become like the PC industry is today and has been lately. Something that is replaced every year or two as OS's and features are constantly added and upgrade becomes almost necessary, or seems so, to the average user. With wireless handsets becominng, at least now, handheld internet access appliances (i.e. PC's), this task does not seem impossible. I'd give them the mass market habit, everyone knows who and what Nokia is and they seem to replace phones on a whim these days, almost like a fashion accessory which is how they are advertised halfthe time.


ps: gotta print out the two analyses and see where the diffs are the 10 point distrib disturbs me.

Just my quick 2%, cheers,

jgc
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Have any of you out there actually used the Nokia phone as to other phones?
I receive a new cell phone for every job I do, so I am able to try out minumum 4 models a year including my personal phone. The most difficult phone to operate and program by far is the the Nokia. The simplest was an older QCOM with one handed operational ease. Unfortunately QCOM does not make this particular model anymore. I test drove a few brands this weekend to determine my next personal phone and the Samsung Wireless Web Dual Band was the easiest to use with the most options. Can't find their symbol-dang. Even after reading the manual(which I always do) the Nokia was still frustrating to operate.
Just my 2 cents.
Leslie
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Have any of you out there actually used the Nokia phone as to other phones?

The most difficult phone to operate and program by far is the the Nokia.


My experience (which also includes some weird off-brands) was just the opposite, but to each his/her own. Many months ago, I recall Nokia getting high(est?) marks for usability.

For an unscientific survey of cell phones:

http://www.deja.com/rate/list_items.xp?CID=11939&PCID=11788&N=0

-Rubic
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As always the LanceMan makes it look easy.

Hmmm ... not sure if you meant this tongue in cheek or as a compliment. In any event, at least you are reading my posts. :-)

Solitariness, I'm afraid that NOK is pretty much the king of the hill (it hurts to finally admit this).

I double-checked with Hoovers, and they indicated that NOK is the #1 cellular phone maker in the world. Looking back through their press releases, it appears they first attained this position back in mid-1998 and have maintained it since that time. However, what I have not been able to find is an overall market share breakdown for the cellular phone market. This could be important for the following reason:

I used to work for a company that was the largest bank in the state of Georgia. However, there were three other large banks that also operated in the state that had all had slightly smaller account bases (less than 5-10% below ours). While we were the #1 bank, I wouldn't have ever said that we were the "category king".

Is this the same situation that NOK is in right now? Right now, I'm not so sure. Until I can locate those numbers, I still don't feel right about giving them a one here.

Convenience vs. Competitors, again this hurts me more than it does you, but I think you're wrong. NOK continues to slay all the other players, I wish it weren't so, but it is.

My wife owns a NOK phone, and it works fine ... no complaints. However, is it that much better than a QCOM, ERICY, or MOT phone? I'm not so sure. I'll have to track down some quality ratings from Consumer Reports to try and convince myself that they are markedly better than the other manufacturers.


Granted, I am probably being harder on NOK than I should be. However, being a top-tier Rule Maker should not be something that is easily attainable, otherwise it diminishes the honor.

Could I be wrong here with my assumptions? Quite possibly ... it wouldn't be the first time, and I can guarantee you it won't be the last. That is the magical thing about these boards -- they provide the opportunity to interact with investors with completely different perspectives on the same subject. So keep the comments coming ... I'm still willing to learn.

the LanceMan
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TMFTribe conducts a self-examination:
Granted, I am probably being harder on NOK than I should be.

Not at all. Although I'm long on Nokia, every NOK shareholder should welcome critical (and recurring) examination of this company.

You bring up an excellent comparison point regarding the difference between being number one vs. being a category killer.

Several months ago, Mycroft presented the case for Nokia as a textbook Fisher company. See TMFGrape's Fisher board for an ongoing discussion. It's possible that Nokia is a great company, a true Fisher company, a great investment, but not (yet) a Rule Maker. Although I'd love for Nokia to achieve Rule Maker status, there's no sense in fudging on the criteria. This does a disservice to both Nokia and the Rule Maker strategy.

-Rubic

P.S. I'm not endorsing TMFTribe's interpretation in favor of Panhale's -- just encouraging the healthy discussion.
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Sorry for resurrecting a topic that petered out months
ago, but what exchange rates did you use to translate
Nokia's results (in Euros) to the $ figures below?  In
particular, did you use a different exchange rate for
the 99Q3 and 98Q3 data, or the same rate for both?


                     Nokia                                        Qualcomm        Motorola
                      (NOK)                                         (QCOM)          (MOT)
                  Current PeriodYear-ago PerioYear-over-Year    Current Period  Current PeriodCurrent Period
                       99Q3          98Q3         Growth             99Q4            99Q3         <Date>
 Income Statement . . .
   Sales                  5,223         3,500      49.2%                  1,060         7,688
   Cost of Goods S        3,282         2,122      54.7%                    621         4,601
   Net Income               662           481      37.5%                    136            91
   Shares Outstand        1,185         1,176      0.8%

 Balance Sheet . . .
   Cash & Equivale        3,455         2,342      47.6%                  1,614         3,527
   Current Assets         9,963         6,860      45.2%                  2,978        16,015
   Short-term Debt          469           521     -10.0%                    115         1,495
   Current Liabili        6,059         4,024      50.6%                    876        11,898
   Long-term Debt           285           174      63.7%                      1         3,598
                                                                               1             1             0
 Margins & Ratios . . .                                                                                     Competitors' Average
   Gross Margins           37.2%         39.4%     -2.2                    41.4%         40.2%                   40.8%
   Net Margins             12.7%         13.7%     -1.1                    12.8%          1.2%                    7.0%
   Cash-to-Debt             4.58          3.37     36.0%                   13.91          0.69                    0.99
   Net Cash               2701.4        1646.8     64.0%                  1498.0       -1566.0                   -34.0
   Fool Flow Ratio          1.16          1.29     -9.7%                    1.79          1.20                    1.50


My own research yielded numbers similar to yours for
99Q3, but markedly different numbers for 98Q3.  The raw 
financial data that I found (from MarketGuide, via 
Schwab) listed the numbers in Euros.  I did some 
checking, and found that the exchange rate on 9/30/99 
was 1.0642 $/Euro, and on 9/30/98 was 1.1787 $/Euro; I 
used those rates to convert the 99Q3 and 98Q3 data from 
Euros to Dollars.

In this case, it didn't matter much in this case which 
exchange rate I used for the 98Q3 data, but I can 
imagine cases where it would.  Basically, over the 
course of the year from 9/30/98 to 9/30/99, the Euro got 
"cheaper" in US$ terms (i.e., 1 US$ could buy more Euros 
at the end of that period than at the beginning).  In 
this case, that difference wasn't enough to change the 
scores in the various RM categories, but what if the 
exchange rate difference had been larger?

What is the right thing to do when you're looking at 
financials in other than US$?  Use the later exchange 
rate to convert all the data (like you apparently did), 
or use the exchange rate as of the date of the data 
(like I did)?  Why?


Thanks!

-Brent
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What is the right thing to do when you're looking at financials in other than US$? Use the later exchange rate to convert all the data (like you apparently did), or use the exchange rate as of the date of the data (like I did)? Why?

Technically, under FAS 52 of GAAP, the income statement is translated at the average exchange rate for the year, the balance sheet other than the equity section is translated at the year end rate. The equity section is translated using a combination of historical rates and current year rates (e.g., net income from the current income statement). This leads to an imbalance when the balance sheet is translated, which is solved by plugging in an amount called current year translation adjustment.

So, from that aspect, you really can't translate foreign financials simply into dollars. As a matter of fact, I don't usually do that, especially if EURO figures are available. While you might get some difference in the net cash section of the Ranker, I prefer to just leave the financials in the local currency and not translate them at all as to the accountant in me, the translation isn't meaningful anyway as the way you translate, for example, Nokia's balance sheet into dollars isn't the same as a US based company translates the financials of its foreign subs into dollars when consolidating.

Phil


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So, from that aspect, you really can't translate foreign financials simply into dollars. As a matter of fact, I don't usually do that, especially if EURO figures are available. While you might get
some difference in the net cash section of the Ranker, I prefer to just leave the financials in the local currency and not translate them at all as to the accountant in me, the translation isn't
meaningful anyway as the way you translate, for example, Nokia's balance sheet into dollars isn't the same as a US based company translates the financials of its foreign subs into dollars when
consolidating.


Then how do you account for foreign exchange differences over time, when you're considering investing in a foreign company? Surely you have to consider the differences over time in the exchange rate?

As a US investor, what I care about is return measured in US Dollars. A foreign company might be doing a bang-up job over time when measured in its own currency; if that currency is sliding with respect to the Dollar, however, the company's results won't be so good for me (a US investor).

In this case, it didn't matter much, because the Euro had only moved from 1.1787 to 1.0642 over the course of the year.

To illustrate, let's consider a hypothetical company that does its accounting in dubloons (DUB). Let's say that their gross sales in 98Q3 were 1000 DUB, and that their gross sales in 99Q3 were 1400 DUB. That's a 40% growth in gross sales; looks pretty good, right?

Well, what if the dollars-per-dubloon exchange rate was 2.0 dollars/dubloon at the end of 98Q3, and 1.0 dollars/dubloon at the end of 99Q3 (i.e., that the dubloon has lost 50% of its value versus the dollar over the course of the year). Now, in dollar terms, I'm looking at gross sales of $2000 in 98Q3 and $1400 in 98Q4. Hey, wait a sec, my 40% growth in gross sales (in dubloon terms) just turned into a 30% loss (in dollar terms, which is what I care about since I buy things using dollars)!

Is the RM strategy fundamentally inapplicable to foreign companies, unless their exchange rate versus the dollar is roughly the same during the two periods being compared (as it is with the Euro, in this case)?


Thanks!

-Brent
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Then how do you account for foreign exchange differences over time, when you're considering investing in a foreign company? Surely you have to consider the differences over time in the exchange rate?

As a US investor, what I care about is return measured in US Dollars. A foreign company might be doing a bang-up job over time when measured in its own currency; if that currency is sliding with respect to the Dollar, however, the company's results won't be so good for me (a US investor).


I don't worry about the foreign exchange differences over time. One thing to keep in mind is that unlike your dubloon example, I'm not looking at investing in foreign companies that are based in places with highly volatile currencies. I don't think you'll find any Makers based in South America or Asia. Most of Europe is moving to the EURO, that makes things pretty stable. I'd rather just use local currency than try and do an arbitrary conversion to dollars.

One other thing to keep in mind is that companies like Nokia do a lot of business in the US, those $US sales are translated to EUROS, which created an exchange difference, now you're translating them back to dollars and if you follow the rules, you end up with another exchange difference. I don't see the need to be that US centric. I'm more concerned with seeing the differences between GAAP accounting and International accounting (which Nokia includes in its annual report). For me looking at the same accounting standards is much more material than looking at $US vs. EUROs.

Is the RM strategy fundamentally inapplicable to foreign companies, unless their exchange rate versus the dollar is roughly the same during the two periods being compared (as it is with the Euro, in this case)?

For me yes, but only because I have yet to run across a company based in a country with a volatile currency that's anywhere near Maker status.

Phil
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Sorry for resurrecting a topic that petered out months ago, but what exchange rates did you use to translate Nokia's results (in Euros) to the $ figures below? In particular, did you use a different exchange rate for the 99Q3 and 98Q3 data, or the same rate for both?

Brent,

Basically what I did was take all the figures that were listed in Euros and multiply them by the conversion factor that was listed in the earnings release (1 EUR = 1.037 USD as of September 30, 1999). I didn't really want the figures to get totally skewed by using two separate exchange rates (one for 1999Q3 and one for 1998Q3), so I just picked the most recent one and used it. That way, all the figures show up in US dollars so that the analysis can be as close to an "apples to apples" comparison as possible.

Hope this helps.

the LanceMan
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