by firstname.lastname@example.org | September 13, 2011 12:29 pm
That headline comes straight from the top of the latest teaser ad I’m looking at now — from George Leong of the Profit Confidential/Lombardi gang, in a pitch for his Pennies to Millions newsletter. I can’t say that I’ve heard of this letter, which might be new (like most publishers, they trot out new letter ideas every few months, and rename or discard older letters that aren’t working well), but he edits a bunch of letters for Lombardi and we’ve looked at a few of his interesting ideas over the years.
And what caught my eye was the comparison to Apple — not the comparison to Apple the greatest growth stock around, or the most dynamic retailer and consumer hardware stock, but the comparison to Apple when it was a bust in the 1990s, with weak products and tiny market share and on the verge of bankruptcy … before Steve Jobs returned, the iPod took off, and the story was rewritten. Leong is implying, at least, that the big tech stock he’s teasing here might be a similar story, with a coming rebound that could couble your money in the next couple months.
So yes, I wanna know what it is — and since you’re here with us, I imagine you’d like the answer too … right? At least we know it’s not a tiny little mining stock or fly-by-night penny stock this time around, so maybe we’ll even find something interesting.
Leong says this is …
“An opportunity so rare, we’ve only seen it happen three times before.
“Now opportunity number four is getting ready to hand investors a potentially huge windfall…”
The “rare opportunity” is that he thinks we’re catching a large tech stock on the verge of a rebound — comparable to Apple’s recovery that started in the years after Steve Jobs came back in 1996. The second example of this kind of rebound trade that Leong gives is IBM in the early 1990s, when it was floundering after missing out on the PC business … before they reinvented themselves as an IT services company and charted a new path to spectacular success in surprisingly short order.
The third rebound example he gives, in case you’re looking for more reason to do a little drooling, is Priceline.com (PCLN) thanks to their recovery from the dot-com crash — a recovery that he says was fueled by management changes, layoffs, and refocusing on core operations.
And in Leong’s words …
“… now we are seeing the same opportunity being set up again with another BIG company.”
Who? Well, they’re not so free with the clues at Lombardi, but we do get some slightly wishy-washy ones to toss into the ol’ Thinkolator — here’s what I sniffed out of the ad:
“This company has been quietly testing the temperature of the markets with a new product idea that cannot be ignored….
“I have discovered that a well-known company is on the verge of releasing a new product that will have instant appeal to millions of consumers. It literally could be the best rebound opportunity we have seen in a decade—and the timing couldn’t be better.
“This new product is scheduled for release prior to the end of the year. It is so secretive that the company has actually given it a code name until they are ready for the unveiling….
“Apple, IBM and priceline.com all had strategies and plans in place to reinvent themselves, making their stock attractive for a rebound play.
“The stock I’ve been watching also has big plans. Plans to reassert itself in its market in the months ahead.
“In addition to installing a new CEO, in the past few days, I have learned that our rebound trade has formed a new partnership with a huge Chinese firm…has plans for a cutting-edge new trade show display in Barcelona that is virtually guaranteed to attract new business…and made a recent publishing deal that will expand its revenue opportunities.
“According to one source from our rebound trade, the company is planning on putting more effort into operator partnerships—rather than direct sales—in its strategy to regain its position as a major player in its niche within the U.S.”
So … not the kind of specific clues I’d prefer, but nevertheless that’s enough to feed into the Thinkolator — along with his hint that the share price is now right around $7.
Before we fire up the Thinkolator though, what are the general criteria that Leong is looking for in his “grueling screening process?”
“Each stock I recommend must:
“Have great financial ratios—they must have low debt, plenty of working capital, and a strong cash flow.
“Have strong earnings momentum—the best companies show increasing profits quarter after quarter.
“Have top-notch management that has a vision and a commitment to the future….
“I also want to point out that some of my recommendations have quick profit potential, while others are more of a long-term play.”
OK, so the Thinkolator has been fed and fueled — and out the other end come our answers, tied up in a neat bow … this is:
Yes, if you’re looking for rebound potential you want to find a stock that has seen the highs and has been beaten down … and that’s certainly the case with Nokia, which is still the world’s largest mobile phone handset manufacturer but which has also become an also-ran in the mobile phone business thanks to the competition in low-end phones and a failure to compete effectively in high-end smart phones over the last four years.
Nokia can be thought of in some ways as the Motorola of Europe, a radio pioneer that jumped on the new cell phone world in the 1980s and broke new ground and had a spectacular global business — but was caught admiring its market share in the mirror when Apple changed the cell phone world with the iPhone four years ago.
And while Motorola rescued itself, you can argue, by embracing Google’s open-source Android system for its new Droid smart phones (and later, agreeing to a takeover by Google), Nokia didn’t have the strength to get any leverage over Google, and they were too late to Android to jump in without any kind of head start … so Nokia’s new management, hired about a year ago, made a deal with the far weaker (in mobile) Microsoft to be the (both companies hope) pillar of the Windows Mobile world with a new Nokia Windows smartphone that’s expected later this year.
And it’s that new smartphone that has a codename — they’re calling it “Sea Ray,” and it’s apparently based on their newest N9 phone but is tweaked to run presumably the newest version of Windows Mobile, which is itself codenamed “Mango.” Of course, almost all the tech companies use top-secret codenames from time to time, and Nokia has “codenamed” lots of phones that certainly didn’t shake the world.
The global smartphone market is obviously huge and fragmented and extremely volatile — you can tell that just by thinking about the fact that five years ago the only smartphone of consequence was the Blackberry (with the possible exception of the Palm Treo, and now Palm’s new owner, HP, has effectively scrapped their mobile business), and now some folks are speculating that Blackberry is going to see their market share continue to erode, with the smartphone market in a few years likely being split three ways by Microsoft, Apple and Google’s Android. Of course, the one thing we can say about a “in a few years” prediction about a crazy market like this is that it will almost certainly be wrong.
Nokia’s chart makes them look like a straight casualty of the iPhone, with the stock hitting it’s post-dot-com peak at around $40 in 2007, the year the first iPhone came out, and pretty much going straight down ever since (with some brief rebounds). They have beaten earnings estimates for four quarters in a row, and they do have a strategic turnaround plan both to maintain their market share in simple cell phones and to focus on building out their Windows smartphone models in partnership with Microsoft (even as they try to wring a couple more years out of their homegrown Symbian operating system, which is losing market share like crazy but saw some new phone introductions just this Summer), but those earnings estimates were already very beaten down by weak performance and dwindling revenues.
The latest bad news from the company came in their guidance cut/abandonment in May and their downplaying of expected Q3 sales and margins when they announced Q2 results in July. They’ve essentially been saying that they face so much competition from Asian competitors for their basic phones, and price competition for their more advanced phones, that they expect revenues and profits to be weak and near break-even — they’re making less per phone and they’re selling fewer phones, not a good combo. They are still selling a ton of phones, to be sure, and still introducing new products — the Sea Ray Windows phone is clearly where they’re making a big bet, but they also just released some new “cheapest ever” phones to compete with Chinese companies like ZTE in the mass emerging markets, but margins are shrinking and they’re not “making it up with volume” like they used to several years ago.
It’s almost an aside in debates about Nokia these days, but the company is also a leader in digital mapping, thanks to their acquisition of Navteq (also back in 2007, when times were good), so if you happen to think that Navteq (which collects and supplies the back-end mapping geodata that many products rely on) is still worth the $8 billion that Nokia paid for them … well, that’s now half of Nokia’s market cap. And Nokia says the Navteq division is not currently profitable thanks to high operating costs, though it’s also their highest margin business by far if you just look at gross profit.
If you’re looking for a catalyst in the next 90 days I think it’s going to have to be that either the sales and earnings turn out much better than expected in the current quarter (which will be announced on October 20) — and I mean MUCH better — or the world is going to have to be enthused by Sea Ray, which will have to make a big splash before Christmas. Either that, or Microsoft buys them out for some reason (boredom?), though they’ve got Nokia doing just what they want already so I don’t imagine MSFT is all that interested in an acquisition.
If you want to see Leong’s reasoning for the possible catalysts spelled out, the stuff about China partners, refocusing on operator relationships, and the Barcelona Mobile trade show is all in this article, too.
If analysts are right about 2011 and 2012 — and since Nokia itself is essentially saying that their guidance is worthless now, that’s a big IF — then the shares trade at about 18X 2011 earnings and 16X 2012 earnings, with revenue projected to be flat over the next year or so. They have lots of cash, with a net cash position of about $5 billion out of their $21 billion market cap … and even if the company is slowly dying, which we won’t really know until we see it in the mirror, it’s possible that the death, if it takes long enough, will be lucrative — they still churn out a lot of free cash, and they pay a huge dividend that’s now over 8% (not because they’ve raised the dividend, but because the share price has fallen so far). The stock has come down far enough this Summer that there are now some fans in the analyst community, though Nokia probably still has to battle it out with Research in Motion (RIMM) for the title of “most hated cellphone company” among individual investors.
I can’t say that the phones from either company fill me with joy, but both will probably be around and building phones in a few years unless they become the target of a surprise acquisition — investors are often quick to pronounce companies “dead” because of weak products or falling market share even if they continue to churn out cash, but sometimes these contrarian bets represent really strong opportunities if the company isn’t quite as sick as the news indicates. It’s worth noting that though both of these high-profile weak mobile phone companies can get value investors excited with their low price/book ratios (both RIMM and NOK are well under 2) and great balance sheets (RIMM has a couple billion in net cash, too), RIMM is smaller and is dramatically cheaper than Nokia based on earnings, with forward and trailing PE ratios around 5 … though it doesn’t pay a dividend. Both companies obviously need good new products (Nokia’s betting on windows, RIMM is betting on it’s own new smartphone operating system that’s now due early next year), but both are also selling a whole lot of phones and are unloved by investors… and Nokia also has the dubious hurdle to clear that it effectively lost the US market for even basic phones years ago, so most US investors never see one of their devices.
If you’d like more info, Nokia is covered extensively by the financial press so it’s not hard to come by opinions — Trefis thinks it’s worth a little less than $7 and compares their performance to watching a horror movie, Morningstar thinks it’s worth $13, RBC recently upped their price target to $9, and if you want a longer form look at Nokia’s turnaround BusinessWeek ran a great article on new CEO Stephen Elop and Nokia’s “rebound” efforts back in June.
But it’s your money — what do you think? Is Nokia cheap enough to buy now? Ready to bet on the rebound and collect that dividend, or do you think we haven’t yet hit the ground on the way down (or think the dividend will be history soon)? Let us know with a comment below.
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