"Hi everybody,

yesterday I had to behave like Mr.Market itself. I felt like a trader because I was forced to sell 2 companies to buy additional shares of HOG and  Nokia (NOK).
In this post I want to share my idea why I thought (and still think) that it would be foolish not to grab Nokia at such a low price.

First: The company

Nokia was founded in 1865 and transformed its business numerous times. It looks like they were in almost every possible business in the last 150 years. They began in the pulp-mill- business. Later they sold rubber boots and TVs. In the 1980s Nokia began in the mobile-phone business.
Nokia consist on 4 units:

Mobile phones: Roundabout 50% of their revenues
Enterprise and Networks: Roundabout 30% of their revenues
Multimedia: Roundabout 20% of their revenues

In the mobile phone market Nokia is the powerhouse with a 40% market share of the global market. Their biggest competitors consist on Motorola, Samsung, LG and Sony-Ericsson.

Is there a moat?

Definetely. Nokia, becuause of its size has an enormous economies of scales-advantage. Their cost per unit is significantly lower than the cost of the competition (Nokia $110, Motorala $140, Samsung $180, LG $160 and Sony-Ericsson $170).

Business outlook:

The business outlook is still intact because the emerging markets offer still a lot of growth opportunities. The purchase decision of the end-user depends mostly on the price alone, where Nokia has the edge against the competition.

The developed markets seems- on first look- saturated because most people have already a mobile phone. It is mostly a replacement market where the purchase decision depends mostly on new features than on price alone.

Developed/lesser developed countries and the sales: (pages 56 ff. of form 20F-2007)

One might could think that most of the selling is in Europe and in Nortamerica. Think twice!!
Only 30% of the business in terms of units is made in Europe and North America (The market share in North America is only 10%). Because of the price differentiation between countries Nokia makes 44% of the revenues in Europe and North America.

The earnings in the mobile phone market growed in the last years mainly not because of the growth in the revenues. It growed because of lower cost structures and higher unit sales(remember: low cost provider!!).

This is a thing that I truly believe Mr. Market is missing!

Implications:

The main business of Nokia is outside the "developed world". Because of their status as price leader I believe the growth opportunities are high for Nokia.

Developed world:

In this field Nokia made a real smart move. They aqcuired Navteq-one of the two primary global electronic mapping companies- for 8.1 billion $ (on first look a catastrophic high price). Navteqs competitor- Tele Atlas- itself will be acquired from Garmin or TomTom (it depends on regulatory issues).

One direct implication in acquiring Navteq is the possibility of gaining additional market share and or higher pricing power in the developed countries (remember: The buying decision in the developed countries depends mainly on features like photoshooting or in the future GPS).

As a byproduct of the acquisition Nokia take a step in the GPSmarket itself and is a dangerous thread to companies like Garmin or TomTom.

Because of the largeness of Nokias business (400 million units mobile phones per year) it is definetely possible that the company offer GPS navigational equipment to the end-user at an unbelievable low additional price, so that the GPS-mobile phone will be an extreme cheap alternative to the GPSsystems of Garmin, TomTom and others.

Valuation:

Until yesterday the valuation was low. Since yesterday the valuation is absurd.
What happened?

Mr.Market got his depression because Nokia expects that the growth (not the absolute numbers) will decline. Reasons are the weak $ (I think everybody with a brain expects that European companies will suffer from the weak $.)
The growth in the first quarter was lower than Mr.Market expected. Nokias revenues growed "only" 28% (yes you read right. 28%!!!!!) But Mr.Market expected 29%. Think what happened? Mr. Market hammered the company 14% down!!

Mr. Market was also surprised that the revenue per unit in @ sank from 83€ to 79€!!
I think nobody explained the funny old man, that there are two things that you can expect:
1. If the $ is weak and you sell in $, so the € numbers decline.
2. Nokia earns the money because of economies of scale.

Right now the valuation is as follows: (I use the numbers of 2007 and expect no growth in 2008)

PE: 10
PR: 1.4
PB: 4.8
ROA: 19%
ROE: 60%
Revenue-margin: 14%

You think 2007 was the exeption from the rule? Better think twice! In the last 14 years Nokia earned always more than 20% on their equity.

Happy investing and much fun with Mr.Market!

Hi all,

this is my first writing on this site. I am from German and I have to admit that my English is lousy at best. But I hope that it could be understand what I want to say.

My portfolio is divided in the three types:

A. The companys that I will hold probably forever (wonderful companies bought at a fair/wonderful price)

Here are my usual suspects. Right now in my account portfolio there are: JNJ, USG, GSK, SNY and KFT. I made a few writings on the first 4 companies in forums, so I dont want to repeat the old writings. KFT is "only" a WEB move. I have to admit it, I would not buy KFT without the information that WEB bought heavily on higher prices because the numbers are not to good in my view. But I believe that when WEB sees a moat that this is probably a good longtime pick.

B. The companys that I will probably hold a long time (good companys at a wonderful price)

Here are companies that have right now a moat (in my view) that will not survive forever (in my view). I will sell them if the numbers get weaker or when I need money to buy wonderful companies.

This group contains BDK, HOG, LOW, MHK, NOK

C. The companys that got a tremendous hit because of fear or irrationality

This companys are short-term plays. But do not  confuse me with Mr. Market. My holding period on short-term plays can be very long when I do not see a better investment.

This group contains AMGN, APOL, GCI, MRK, SGP and UNH.

Maybe I will do a little writing on AMGN or GCI or UNH next time but now I want to dig a little deeper on APOL.

In the last two weeks Mr. Market behaved - in my view- like his usual self. He got panicked out on a few extremely interesting stocks.

1. Apollo
2. Merck
3. Schering-Plough

In my writing I will try to explain why I think that the old funny man was totally irrational (like usual) with Apollo.
A writing on MRK and SGP would sound very similar.

 Apollo

The company(in short):
Apollo is one of the leading supplier of extension studies. With the University of Phoenix they have the biggest private university in the US.
A so called "red flag" appeared because there was a issue with the right valuation of stock options (a greedy management is not worth a long term bet in my view).

The revenue and earning growth from 1993 to 2003 was unbelievable good. Because of revisited earnings there was a earnings decline in 2004. Since 2005 the earnings are still flat.

Is there a moat in the business?
1. It is definetely not easy to build a new "brand" in the business. First a new company had to spend a whole lot of money to get a "foot" in the business. You have to build a name that is in my view really expensive. 

2. Apollo is in a regulated business. That means Joe Sixpack can not establish a private university. The government give a regulatory approval called accreditation. There are different levels of accreditation in the US. The most valuable accreditation is the regulation which makes it easier for students to transfer credits to public universitys, which is not easy to get. Guess what kind of accreditation Apollo has! Right, they have  the most valuable. This is a huge competitive advantage. One extremely interesting point is that only accredited schools can accept federally subsidized student loans. So potential competitors have a big disadvantage to compete with Apollo.

What do the numbers "say"?

From 1993 to 2008 the revenue grow with a satisfying speed. The price-revenue-ratio stays at a modest 2.3. The ROE was only one time under 25% in the last 15 years (in the year 2004 because of the revised earnings. You know the valuation of the options...). The revenue margins were allways above 10% in the last 12 years with the exeption of 2004. In 2004 the revenue margin was a "modest" 7.3% (not too bad in my view).

The stock:

After the earnings revisiting and the flat earnings since 2005 Mr. Market is not in love with Apollo. The stock- formerly known as the HIGHFLYER- had a short run in the last months before the last earnings announcement that came on the 20. of march.
The company posted a loss of 19 cents per share because of a charge related to a class action lawsuit. Independent of the charge, Apollo recorded earnings of 41 cents per share. The crux was: Mr. Market expected earnings of 52 cents per share :-). The sales were not good for Mr.Markets mood, too. (When I would be cynic, I would state that Mr. Market had to high expectations.).

My view:

The decline to 40$ is in my view not approbriate. With the nice run in the last week it could be that if KO`s stock loose a bit of its valuation I will change Apollo in Coke. But I am not in a hurry to sell Apollo because I dont think that the stock is expensive. But it is definetely not a longterm bet for me.

Happy investing!