"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!