SIVY ON STOCKS from money.com
May 7, 2001

Higher Flyer

Top techs such as Nokia may not look cheap by traditional valuation
measures. But they may still be good buys.

By Michael Sivy

Value is a relative term. Every once in a while, you get a chance to buy
shares in a company with annual earnings growth of more than 20 percent at
a price/earnings ratio of 16 or less. But that doesn't happen very often.
Most of the time, conservative investors are lucky to find 14 percent
growth at a 16 P/E. Slightly more aggressive investors might be happy with
18 percent growers at P/Es in the low 20s. The most successful growth
stocks, however, may never fall all the way down to those cheap valuations.
But that doesn't mean you shouldn't buy them.

In fact, there are good reasons to devote at least a part of your portfolio
to those kinds of high flyers. For one thing, those companies are typically
among the world's most successful. In addition, they receive ongoing
support and sponsorship from Wall Street analysts. As long as they continue
to meet expectations, they will hold up fairly well in temporary market
downturns. And they will be among the first stocks to bounce back.

A perfect case in point looks to be Nokia [NOK]. The Finnish giant is the
most successful firm in one of the world's most rapidly growing industries.
And since 1997, Nokia's share of the global wireless-phone handset market
has risen from less than 20 percent to 35 percent, helping the company
nearly double earnings per share since 1998.

Of course, no company can increase its market share indefinitely, but there
are several factors that should help sustain Nokia's superior profit
growth. Since most everyone who would use a cell phone already has one, the
bulk of the sales of cell phones using existing technology is replacement
business. And when existing users switch phones, they tend to maintain
brand loyalty -- if they change providers at all, they migrate toward the
strongest one (say from Ericsson to Nokia, but not the other way around).
As a result, Nokia could gain another couple of market share points in
current-technology handsets.

Even more important, the company is capable of attaining a market share
topping 40 percent in the next generation of handsets -- both those that
use more sophisticated technology for voice transmission and those that
will provide paging, instant messaging, and Internet access. Overall, the
handset market is projected to grow at an annual compound rate of just
under 23 percent over the next four years. And with market share gains,
Nokia's sales should do even better.

In the past few quarters, the over-capacity problems that have plagued the
telecom industry have been hurting handset makers as well as service
providers. Not only has growth slowed -- total sales of cell phones were up
only 12 percent in the first quarter -- but the introduction of new
technology is being delayed. As a result, Nokia's earnings, up just 15
percent in the first quarter, will likely fall short of a 20 percent gain
for the year as a whole.

Once the current slump passes, however, Nokia's growth should recover to
nearly 25 percent a year. And so, despite a P/E of 40 based on estimated
earnings for the current year, the stock seems quite attractive. At $33,
Nokia is trading at just over half the level it was a year ago. And the
share price, which dipped as low as $21 a month ago, now appears to be in
an upswing. Even if the next couple of quarters show subpar results, Nokia
figures to be back among the market's brightest stars within 12 months.

###

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http://www.money.com/depts/investing/sivy/index.html

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