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TMF Grape's Nokia Analysis


Financial Analysis Company Being Evaluated Competitor #1 Competitor #2 Competitor #3

Nokia Motorola Ericsson Qualcomm
Current Period Year-ago Period Year-over-Year Current Period Current Period Current Period
12/31/98 12/31/97 Growth 12/31/98 12/31/98 9/30/98
Income Statement . . .
Sales 79,231 52,612 50.6% 29,398 184,438 3,348
Cost of Goods Sold 49,342 33,999 45.1% 20,886 105,251 2,333
Net Income 10,461 6,396 63.6% 1,018 13,041 126
Shares Outstanding 586,650 576,583 1.7%

Balance Sheet . . .
Cash & Equivalents 17,718 12,361 43.3% 1,624 18,233 303
Current Assets 46,460 32,293 43.9% 13,531 125,532 1,537
Short-term Debt 4,518 3,293 37.2% 2,909 6,615 154
Current Liabilies 26,476 18,376 44.1% 11,440 66,941 882
Long-term Debt 1,530 1,348 13.5% 2,633 10,711 3,863
1 1 1Competitors
Margins & Ratios . . .
Gross Margins 37.7% 35.4% 2.3 29.0% 42.9% 30.3% 34.1%
Net Margins 13.2% 12.2% 1.0 3.5% 7.1% 3.8% 4.8%
Cash-to-Debt 2.93 2.66 10.0% 0.29 1.05 0.08 0.75
Net Cash 11670.0 7720.0 51.2% -3918.0 907.0 -3713.7 -2241.6
Fool Flow Ratio 1.31 1.32 -0.9% 1.40 1.78 1.70 1.62


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Ranking Rule Makers

1) Brand Points (0-1) 3) Financial Direction Points (0-3)
Familiarity 1 Sales Growth 3
Openness 1 Gross Margins 3
Optimism 1 Net Margins 3
Legitimacy 1 Shares Outstandin 2
Inevitability 1 Cash-to-Debt 2
Solitariness 1 Fool Flow Ratio 1
Humor 1 Expansion Potenti 2
Subtotal 7 Subtotal 16

2) Financial Location Points (0-2) 4) Monopoly Status Points (0-4)
Mass Market Habit 2 Gross Margins 2
Gross Margins 0 Net Margins 4
Net Margins 2 Net Cash 4
Cash-to-Debt 2 Fool Flow Ratio 2
Fool Flow Ratio 0 Convenience 2
Your Interest 1 Subtotal 14
Subtotal 7
5) Your Enjoyment 1

Total Score 45 Second Tier
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Nice work TMFGrape!

I started comparing this analysis with the yearly numbers to the one that I did last week using the quarterly numbers, and they pretty much show the same thing: NOK is a strong second-tier Rule Maker that deserves closer attention.

The only comments I have involve some of the subjective components of the rankings. For example:

1) Solitariness: I'm not so sure I would give Nokia a 1 in this category simply because cell phones seem to be a commodity business right now. Yes, there may be some subtle differences between one manufacturer and another, but I think Joe Six-Pack is going to end up purchasing the one with the best deal. This is probably a really subjective call whichever way you go since its hard to enumerate what makes a "standout category king", so I'll let you slide here.


2) Mass Market Habit: I think one point would be more in line here, or perhaps even zero points. I really don't see someone going to the store and buying a new cell phone more than once or month, or even once a year. I know MYCROFT has talked up the idea of people buying different color phones to match their wardrobe, but I don't see that happening with cellular phones at their current prices.


I guess I tend to be a little more on the pessimistic side with my rankings, but that makes finding a true Tier One Rule Maker all the more sweet.

Fool On!

the LanceMan
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I am currently in the market for a cell phone at the moment. My requirements are probably different than most so I have fewer choices available.

I want a cell phone which allows me to browse the interent so I can view/send email, check out the stock prices, perform on-line banking and do some broker business.

Alot of the people I work with are also in the market for similar devices. Currently, there are only two phones available in the US that may meet my requirements. One is made by Nokia and the other by Qualcomm.

I believe the market for similar devices will grow and those companies that are first to offer will also benefit by selling them at higher margins.

Jerry
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2) Mass Market Habit: I think one point would be more in line here, or perhaps even zero points. I really don't see someone
going to the store and buying a new cell phone more than once or month, or even once a year. I know MYCROFT has talked
up the idea of people buying different color phones to match their wardrobe, but I don't see that happening with cellular
phones at their current prices.


In the Rule Maker book, Cisco, Dell, and Intel are all given 1 point for Mass Market Habit. This caught my eye immediately when I looked in the Appendix and I wondered how this could be. If I adjusted my thinking a little bit, I was able to reason that, yeah, they do have a mass market and the technology people that order computers, etc. for their businesses do repeatedly purchase during the year. If we give Cisco, Dell, and Intel 1 point, then we should probably give Nokia 1 point as well in order to be consistent.

Domer
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I took a look at Nokia a while back and passed for the simple--yet extremely important--reason that I couldn't figure out what the moat around Nokia's castle is. Nokia today reminds me a lot of Motorola a few years ago: super-hot as it cranks out popular phones (in fact, I am a very satisfied owner of a Nokia phone), but look what happened to Motorola. There was a technology shift from analog to digital and new competitors (mainly Nokia) moved quicker. The result? Motorola today trades for less than it did FOUR YEARS AGO. What's to prevent this from happening to Nokia? I think the relative lack of a moat is evidenced by 13% net margins. Compare these margins to MSFT, INTC, and CSCO--businesses with enormous moats, IMO. If I'm going to assume the risk of holding a tech stock, it will be ones with these type of moats.
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<2) Mass Market Habit: I think one point would be more in line here, or perhaps even zero points. I really don't see someone going to the store and buying a new cell phone more than once or month, or even once a year. I know MYCROFT has talked up the idea of people buying different color phones to match their wardrobe, but I don't see that happening with cellular phones at their current prices. >

I just bought a new Nokia phone today and because I signed up with Air Touch , I got the phone for $55 . I had expected to pay $300 for the model. But after talking to the salesman I discovered that I paid $55 but that Air Touch pays Nokia the full price of the phone . They expect to get their money back from my using the phone and gave me such a good deal for that reason. Feeling great at only paying $55 for my Nokia, I asked him if their were any accessories that I could buy. Well I cleaned out the store in Nokia accessories and here are the prices that I paid;

I must warn you that I went a little overboard;

4 Face plates (1 Walnut, 1 Green, 1 Purple and one with the USA-Flag) cost $20 dollars each

1 Adaptor for a hands free plug ,cost $40

1 Leather Case , cost $25

1 Over the head hands free device , cost $40

One extended life Mimh Battery = cost $35

1 AC/DC Dual Well Desk charger cost = $50

Total Bill = $270

Now what I would like to show everyone is that I went in there to buy the Phone expecting to pay $300 for it. When I found that it would only cost me $55 I was so excited that I went for the accessories. Now I believe that Nokia has figured this out to as it alone makes the only phones that are available with changable face plates. I can see young girls switching the face plates, for they only cost $20 each. Whats $20 for the fashion conscious.

I also asked him about the Qualcomm products and how Nokia was selling along with the Motorola , Sony , Mitsubishi and Ericsson. He told me that people like the Nokia's and he sells 2 Nokias to every 1 of the others. He told me that he hates to sell Qualcomm models for 2 out of every 10 that he sells come back to be repaired. Plus he likes to sell Nokias for he has all the accessories which he makes a good profit on. The salesmen like Nokia for the accessories carry a larger commision for them.

Thus NOKIA ;

1) makes the customer happy by ,making deals with the service providers allowing them to sell their packages in contracts, and selling the phone for $55

2) generates tremendous profits from the accessories

3) Helps the store that sells them make more profits per customer do to the accessories,

4) Helps the front line salesman rack up higher pay do to the larger commission % for the accessories.

Thus Nokia is the #1 choice for all those involved in the sale, from the customer, to the store keeper and the salesman. Everyone wins. Nokia also makes a model using the CDMA chip called the Nokia 2180 and is on the shelf right next to the Qualcomm Model. He told me that he pushes people towards the Nokia model for he can sell add ons and doesn't worry about repairs like he does with the Qualcomm, He told me besides the chip which is the same in both phone models, he thinks the Qualcomm phone is junk. He thinks that Qualcomm should stop making the phones and just concentrate on the chips, which would make his life easier.

I hope this shows that everyone wins through the amazing marketing system that Nokia has set up. Nokia doesn't make its huge profits just from the phones but from the accessories as well. I walked out of the store smiling as you can imagine.


MYCROFT
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I hope this shows that everyone wins through the amazing marketing system that Nokia has set up. Nokia doesn't make its huge profits just from the phones but from the accessories as well. I walked out of the store smiling as you can imagine.


I'm sure the salesman was smiling too since he had your $270. :-)


the LanceMan


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WTwilson,

I asked the same question, along with some others, on the Nokia board this morning and have gotten very interesting responses from MYCROFT and umberto. You might wish to check them out.

rockefelleriaint
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Lance

Thanks for your thoughts.

On Mass Market habit I gave Nokia a 2 for a couple of reasons. The first is that even though you may not purchase one of its phones every day, you certainly use it every day. The same kind of logic that I'd use in giving Intel or Microsoft a 2 in that category.

As for solitariness, yes it's possible that the cell phone could be viewed as a commodity, but I don't believe it will get to that point. There's a reason that Nokia has moved ahead of MOT into the #1 slot. In another message I speculated that if Nokia doesn't make it to RM status it could at least be a Merchant King. Either way there are some ways that it can differentiate itself and its product from the competition.

Interesting company. I appreciated seeing your analysis as well as it's good to see different viewpoints on the subjective criteria.

Phil
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<<He told me besides the chip which is the same in both phone models,
he thinks the Qualcomm phone is junk. >>

The chip is the same for both so Qualcomm makes money no matter
which one (cdma phones) you buy. In fact QCOM does not want to
build the cdma cell phone. QCOM just wants to collect 3% on every phone
that is sold regardless the manufacturer. Of course QCOM does concentrate
on building the next generation chip a combined laptop and cell phone chip.

Sure is a nice day
Michael
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