Nokia (NYSE:NOK) will announce its third-quarter earnings Oct. 20 amid rampant speculation about whether the company will show marked improvement. Nokia is in the midst of a complete overhaul, replete with job cuts, factory closings and business unit consolidations. Most importantly, it is switching to Windows Phone 7 as its primary smartphone platform.
You can debate whether this is a good move until the cows come home, but let me save you the trouble by recommending you sell its stock now — before it’s too late — and buy semiconductor specialist Texas Instruments (NYSE:TXN) with the proceeds.
Market Share
In September, the EURO STOXX 50, which represents 50 of the largest companies in the euro zone, deleted Nokia from the index. Oh, how the mighty have fallen. Clearly, Nokia’s best days are behind it. Nokia’s market share was 30.6% as recently as the first quarter of 2010. According to Gartner Inc., it was down 550 basis points by May of this year to 25.1%, its lowest market share since 1997. Estimates suggest it could drop as low as 8% by 2012 before leveling off in 2013.
In a bid to salvage some of this, Nokia has thrown its hat in the ring with Microsoft (NASDAQ:MSFT), a company with its own set of issues, one of which is an inability to think outside the box. While most experts agree that Nokia should put its Symbian operating system out of its misery, I’m not sure Windows Phone is the answer, either. Sure, the Windows Phone 7.5 has received some favorable reviews, but it’s still a long way from the iPhone or even some of the best Android offerings. This is a case of too little, too late.
Emerging Markets
As part of its restructuring plan, Nokia is moving 2,200 jobs from a Romanian plant it is closing to one in Asia, where many of its customers are. This makes sense to an extent. Asia-Pacific accounted for 39% of its overall revenues in 2010, higher than revenues it generated in Europe, its home turf. In fact, China and India were Nokia’s two top markets in 2010. Its smartphone market share in India, for example, is 46% — 25% higher than Samsung’s (PINK:SSNLF), its next biggest competitor. Apple (NASDAQ:AAPL) barely registers, at 2.6%.
It seems the iPhone isn’t ready for the Indian market just yet, although it will be once a few things happen. First, Apple needs to improve its distribution in India. Until it can open its own stores, it will have to rely on its distributors. Second, it needs the middle class to grow in size and wealth. Apple’s products aren’t cheap, especially in India. Third, and most important, it needs the 3G network in India to get much better. None of these issues can be remedied overnight. But when they are, Apple’s market share goes up and Nokia’s goes down. End of story.
Good Price
Texas Instruments’ story is all about its $6.5 billion takeover of National Semiconductor. The deal adds 12,000 products to its analog chip catalog while also providing access to the industrial market, an area where it has little exposure. Cowen & Co. analyst John Barton says the deal creates a substantial advantage for Texas Instruments and puts significant pressure on power-management companies like Microchip Technology. RBC Capital Markets initiated coverage of TXN on Oct. 12 with an “outperform” rating for reasons mentioned previously.
Analysts clearly like the deal. With $6.4 billion in cash and trailing 12-month free cash flow of $2.5 billion, Texas Instruments won’t have any trouble paying down the additional debt it will take on to finance the acquisition.
Investors seem to agree. The Hussman Strategic Growth Fund purchased 1.25 million shares, a new position, between April and June 2011, and PRIMECAP Management added 2.1 million shares in the second quarter, bringing its total holdings to 57.9 million shares, or 5%, of the company.
Analysts like it, institutions like it, but why should you like it? Because its forward P/E of 12.6 is likely too high. Ninety days ago, the consensus estimate for 2012 earnings per share was $2.73. It’s now $2.42. If this deal produces anywhere near the synergies management is expecting, it will blow past the current figure. In the meantime, enjoy its 68-cent annual dividend, which the company increased in September by 31%.
Bottom Line
The most important priority of investing is protection of capital. Holding Nokia puts that capital at risk unnecessarily. Texas Instruments does not.
As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.
