Price competition tough on makers of cell phones

Taking Stock

Your Money

May 02, 2004|By ANDREW LECKEY

WHAT'S YOUR opinion of mobile phone makers Nokia Corp. and L.M. Ericsson? I like prospects for the industry, and I'm trying to decide where to invest.

- W.H., via the Internet

The good news is that more than 471 million cell phones were sold last year, a 16 percent increase over 2002.

Finland's Nokia ranks first in handset sales, while Sweden's Ericsson leads in wireless infrastructure equipment.

The bad news for the cell phone industry is that worldwide competition is brutal because of price competition from Asia's Samsung, Sharp and NEC. The price of handsets is half what it was five years ago, and financial results of both these companies with significant U.S. sales are hurt by the depreciating dollar.

Shares of Ericsson (ERICY) have increased 76 percent this year, after last year's 163 percent rise. Nokia (NOK) is up 1.5 percent this year, after a 12 percent gain last year.

Ericsson, completing a major restructuring with heavy layoffs, says cost cuts continue to improve gross margins and believes the global wireless market has stabilized. It is launching new mobile camera phones in the second and fourth quarters.

Nokia, which will launch 40 new handsets this year, missed its first-quarter sales estimates. While industry cell phone shipments rose 25 percent in the quarter, Nokia's were up 19 percent, primarily because it didn't offer enough midprice color screen phones.

Despite its loss of market share, Nokia holds 35 percent of the handset market vs. No. 2 Motorola's 16 percent share. Ericsson ranks fifth.

Because its stock hasn't experienced the price jump that Ericsson's has, Nokia receives a stronger consensus stock recommendation from Wall Street analysts. Nokia merits 13 "strong buys," 11 "buys" and 10 "holds." Ericsson receives one "strong buy," nine "buys," 10 "holds, two "sells" and one "strong sell."

Ericsson is cash-rich because of an equity rights offering that raised $3 billion, but its long-term debt has increased and is now rated as junk. Nokia features tremendous cash flow and an outstanding balance sheet. Deferred purchases by wireless carriers hurt them both.

Earnings in the communications equipment industry are expected to rise 89 percent this year, while the forecast is a 15 percent increase for Nokia and no gain for Ericsson. Next year, the industry projection is 28 percent, with Nokia rising 12 percent and Ericsson 23 percent.

The five-year annualized earnings forecast is 14 percent for the industry, 12 percent for Nokia and 10 percent for Ericsson.

What are the highest dividend-yielding stocks these days?

- D.T., via the Internet

The highest-yielding industries are real estate investment trusts at 6.3 percent; tobacco at 5 percent; wireline telecommunications at 4 percent; gas utilities at 4 percent; and electric utilities at 4 percent.

"Companies with high yields typically have money, don't need to reinvest much in the company and their shareholders want to be compensated because the share price isn't rising much," said Sam Stovall, senior investment strategist with Standard & Poor's in New York. "While rising interest rates hurt high-yielding stocks because they're competing with bonds, the tax code favors dividends over bond interest."

The highest-yielding individual stocks in the S&P 500 were recently Apartment Investment and Management (AIV) at 7.7 percent; Equity Office Properties Trust (EOP) at 6.7 percent; R.J. Reynolds Tobacco Holdings (RJR) at 6.4 percent; Equity Residential (EQR) at 5.9 percent; UST Inc. (UST) at 5.8 percent; Ameren Corp. (AEE) at 5.5 percent; and SBC Communications Inc. (SBC) at 5.2 percent.

Always look at how consistent the dividend yield has been and whether the company is likely to sustain it. A number of large companies are offering dividends for the first time this year.

I have a diversified portfolio and would like to invest a small portion in Japan. What's your opinion of Fidelity Japan Fund?

- T.D., via the Internet

Japan is on the mend economically, making it one of the more attractive world markets right now.

The question is how much staying power that nation's recovery will have. In addition, volatile currency fluctuations continue as the Bank of Japan intervenes anytime the yen moves too high against the U.S. dollar.

This fund is betting on a big boost from the Japanese consumer, who is benefiting from increased borrowing potential from banking reform and the growth of new consumer finance companies.

The $550 million Fidelity Japan Fund (FJPNX) gained 65 percent over the past 12 months to rank just below the midpoint of all Japanese stock funds. Its three-year annualized gain of 1.69 percent placed it in the upper 40 percent of its peers.

"If you can focus on the long term, investing in Japan makes sense because the underlying stock values should increase and its currency should also make gains," said Jack Bowers, editor of the independent Fidelity Monitor newsletter (www.fidelitymonitor.com). "This fund could turn out to be a good bet."

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