Louis Wilson Fund - Equity Research

November 9, 2007 Analyst: Michael Pantin

Nokia Corp. (NOK-

NYSE)
PRICE: $37.94 52 Week Range: 42.22-18.87 S&P 500:
1453.70

LWF Company Rationale:

We are not recommending purchase of Nokia Corp at this time. Although we feel that the company would be a good
addition to the LWF, the current price is too high. Nokia’s performance bears watching over the next few quarters, as it is
poised to take market share from its closest competitor, Motorola. Interbrand has recognized Nokia as one of the world’s
most recognized and most valuable brands. It also has strong penetration into emerging markets for wireless handset
(mobile phone) sales, and is experiencing growth in the larger margin market for smartphones. Nokia’s scale advantages
give it considerable bargaining power with its suppliers, and give it advantages in supply chain management (Morningstar,
2007). Nokia’s free cash flow generation, dividend growth, and share buybacks make it an attractive target for investors.
Our targeted purchase price is $36.00 with an assumed margin of error of 30%. The security is currently trading at
$37.94/share, above average for its 52 week trading range. Our four year price target is $44.00.

• Nokia blends well with the LWF’s strategy and goals. The firm is in excellent financial condition, with little
debt and the ability to generate substantial free cash flow (capital spending is only 1.5% of sales).
Management is competent and modestly compensated, and has a tight grip on cost control. Large profit
margins have moderated in recent years as the average selling price of handsets have declined, yet earnings
power remains strong. Nokia’s ROE and ROA are larger than all of its largest competitors. Though the
aggregate market growth for mobile phones is stabilizing, Nokia remains the sales leader in the industry. It
has 36% market share of the global wireless handset market, twice that of its closest competitor, Motorola.
Nokia is also the dominant provider of mobile phones in emerging markets, where it has 45% market share.
Its institutional following is low, with the Fidelity Magellan Fund holding the largest amount (2.26%) of
shares.

• Business Summary: Nokia is the world’s largest manufacturer of mobile phones (e.g. Nokia N95), and also
produces networking equipment (e.g. switches), multimedia applications (e.g. Ovi portal), and enterprise-level
solutions for security and mobile connectivity (e.g. wireless e-mail services). It operates four business
segments. The Mobile Phones segment connects people by providing mobile voice and data capabilities
across a range of mobile devices. The Multimedia segment provides mobile multimedia experiences to
consumers in the form of advanced mobile devices and applications with connectivity over multiple
technology standards. The Enterprise Solutions segment offers businesses and institutions a range of products
and solutions, including enterprise-grade mobile devices, underlying security infrastructure, software and
services. The Networks segment provides network infrastructure, communications and networks service
platforms, as well as professional services to operators and service providers (Reuters, 2007). Sales for
Mobile Phones in 2006 were $24,769 mil with a margin of 13.25%, sales for Multimedia were $7,877mil with
a margin of 12.5%, sales for Networks were $7,453 mil with a margin of 5.3%, and sales for Enterprise
Solutions were $1,031 mil with a margin of -25%. Nokia’s growth strategy includes expanding their presence
in subscriber services to increase margins, smooth seasonalities, and increase subscriber retention (Merrill
Lynch, 2007). It also will increase product offerings for smartphones, which have higher margins and have
the capability to use Nokia’s service offerings. Nokia will also continue to aggressively compete in the
handset market in developing economies.

• Growth Strategy: Nokia’s growth strategy includes expanding its presence in subscriber services to increase
margins, smooth seasonalities, and increase subscriber retention (Merrill Lynch, 2007). This can include
navigation services from its Navteq subsidiary, or multimedia/gaming offerings from its Ovi portal. Nokia
also will increase product offerings for smartphones, which have higher margins and have the capability to
utilize its service offerings. Nokia will also continue to aggressively compete in the handset market in
 developing economies. Through its joint venture with Siemens, Nokia Siemens Networks (NSN) produces
network hardware that is steadily rising in sales. Nokia is also prepared to enter the wireless broadband
market with its WiMAX infrastructure equipment. Nokia relies on effective marketing and a market
segmentation strategy to target different phones at different customer niches (Morningstar, 2007).

• Nokia has a 5 year revenue growth of 5.86%, which is lower than Qualcomm and Motorola. This can be
explained by Nokia’s poor sales in 2004 and 2005, when it missed demand shifts towards clamshell-style or
“flip” phones (Morningstar, 2007). This resulted in lower sales and loss of market share. Nokia has since
rebounded, and its sales are projected to grow at a rate of 6.05%. This rate is reasonable, considering that
most of Nokia’s future sales will be replacement phones, not new subscribers. The growth in new subscribers,
at one time very rapid, has slowed significantly and the cell phone replacement cycle is more consistent with
growth rates in the single digits. Nokia states that 65% of volume in 2007 will be attributable to replacement.
Nokia’s rate is also achievable assuming it does not miss another important consumer trend, and the demand
for smartphones continues to be high. Future trends include more convergence with mobile phones,
computers, and other electronic devices. As smartphones become more complicated, Nokia could find itself
competing against large software companies, like Microsoft. As with mobile phones currently, average
selling prices of smartphones will begin to fall and profit margins will begin to shrink as competition
increases. There will be an increasing demand for mobile data, and Nokia can position itself as both the
device manufacturer, the content source, and the infrastructure provider. Nokia will need to rely more on its
Multimedia, Networks, and Enterprise Services segments as the mobile phone market matures.

• Management: Nokia has benefitted from effective management. Its ROE, ROA, and ROIC are all higher
than all of its major competitors. Nokia’s ROE is almost 3 times larger than Qualcomm’s. It also has higher
inventory turnover and asset turnover than its closest competitors, indicating that Nokia is more efficient at
using its assets and inventory in generating revenue than Qualcomm, Motorola, and Ericsson. Nokia has not
been aggressive with acquisitions, having acquired only 10 companies in the past six years. Most of these
acquisitions were wireless Internet services businesses, which augmented Nokia’s position in offering
subscriber services. Management has been known to set overly optimistic expectations and fail to meet them,
however expectations have been more realistic lately. Management has a reputation for cutting costs. The
firm does not issue many options, and options represented less that 5% of shares outstanding in 2005. For a
technology firm, Nokia’s salaries for management are very reasonable. Management also owns less than 1%
of total equity, and has been reducing the number of shares outstanding by 5%/year through buybacks.

• EPS 2007 $1.81, Forecast EPS 2008 $2.15, Forecast EPS 2009 $2.33.

Industry, Competitive, and Regulatory Factors:

Industry and Market
• The mobile phone industry has approximately 2 billion wireless subscribers.
• Key competitors include Motorola, with an 18% share of the mobile phone market, and RIM which has 10%
of the smartphone market.
• Rivalry in the mobile phone market is intense and inconsistent. Currently, the competitive landscape is calm.
Competition can increase suddenly, and erode profit margins.
• Nokia has higher EPS and revenue growth than all of its closest competitors
• Nokia has higher profit margins that Motorola, but Qualcomm has higher profit margins than Nokia.
• Key customers for Nokia are the end users. The smartphone end-user is of particular interest to Nokia, as is
the end-user in a developing economy. Service providers, or operators, are a secondary customer for Nokia.
• A pending legal dispute with Qualcomm over CDMA revenues could adversely affect Nokia’s profitability.
Risk:
• Nokia is vulnerable to changes in the business cycle. In the 2001
recession, Nokia’s total return dropped 43%, and net income dropped 46% from 2000.
• Maturation of the mobile phone market has caused sales growth to slow,
but it has remained sustainable around 5.5% to 6% a year
 • Profit margins have declined as competition in the industry has increased,
causing average selling prices to drop. However, margins are expected to remain consistent in the high price
point smartphone market and low-end market where competition is not as intense (Lehman, 2007).
• Competition over scarce components has been high in recent months,
causing Nokia to reduce the volume of mobile phones manufactured. Nokia’s scale advantages give it the
capability of coping with supply shortages better than any of its competitors.
• Fast-growing Asian markets are very competitive, and low-cost
manufacturers are bringing products to market that have cut the average selling price of handsets in Asian
markets in half (Morningstar, 2007).
• Nokia is an export-driven firm, and a weak dollar threatens its growth
potential (Morningstar, 2007).
• Missing important consumer trends can cause loss in market share, as seen
in 2004 and 2005.
• Nokia Siemens Networks has produced sizeable losses in its first months
of operations. Management has taken steps to cut expenses (Valueline, 2007).
• Nokia’s sharp run-up in price over a relatively short period of time may
make it less attractive to investors as a long-term holding (Valueline, 2007).
• If subscriber growth and upgrade cycles are lower than anticipated,
Nokia’s revenues will fall (Merrill Lynch, 2007).
Valuation:
• Nokia has a current P/E ratio of 17.7x.
• We expect Nokia to sell at a normal P/E of 13.9 times and expect earnings per share to reach $2.74 by 2011.
Based on these forecasts we target a mid price of $47 by 2011.
• Nokia is trading above its intrinsic value, which we estimate to be $36. We believe it is overvalued at its
current price of $37.94.
• Multi-stage DDM analysis with a non-constant growth rate of 11% suggests an intrinsic value of $26.23. The
Dividend Yield model produces an intrinsic value estimate of $31.90, and the Dividend Payout model
produces an intrinsic value of $23.87. The growth rate will need to be closer to 15% to match the P/E-based
intrinsic value estimate.
• Providing devices and applications for wireless connectivity is Nokia’s value proposition to its customers.
Key drivers for this strategy are the growth of mobile data applications, wireless broadband, and network
services.
• Currently there are 3.825 billion shares outstanding with small institutional investment. The Fidelity
Magellan Fund has the largest holding at 2.26%.
• Some analysts are very optimistic about the sales of smartphones in the next quarter and the next year. If the
economic outlook continues to worsen in the US, revenues from this line of products are likely to fall.
• Nokia should be able to meet estimated EPS figures, given the estimated growth in market share, revenues,
and projected profit margins.
• Nokia’s consistent cash flow has allowed it to continue buying back stock, which supports the projected
increases in EPS.
• Current assets exceed current liabilities by 2 to 1, and its debt to equity ratio is nearly 0.
• Analyst comments on Nokia’s US market share problems and opportunities are pending.
• Sensitivity analysis of P/E, EPS, and IV is in process.

Indicated Present Value Range (Ouma Model Summary): High Mid Low
P/E @ 8.3% PE range 12.0x to 22.0x $46 $36 $26
Stock Performance Graph (last 5 years):
WF Industry Sheet here

Analyst: Michael Pantin

DATE: 11-9-07
Tickers
Growth Rates (%)--MSN
Rev Growth Qtr vs Qtr
EPS Growth YTD vs YTD
5-Year Revenue Growth
5-Year Dividend Growth
Financial Condition-MSN
Debt to Equity
LWF Proforma Model here

Nokia
COMPANY BASICS

Ticker: NO
Date: 11/2/
Price: $37
Last Dividend: $
P/E (next year's EPS)

Risk and other ANALYSIS

Times Interest Earned