Nokia Has Investors’ Number; Earnings Hiccup at Whole Foods

Nokia (NOK)

(MIKE: Buy)

(JIM: Buy)

Jim: Explain something to me, Mike. Nokia is the world’s leading maker of portable phones, and it’s based in Finland. Its closest rival is a Swedish company, Ericsson. Now how did Scandinavia, of all places, get a lock on this cutting-edge industry? I mean, what’s next? Greenland will be the DVD capital of the world?

Mike: Maybe it’s just so darn cold up there that no one wants to leave their cars to use a pay phone.

Jim: Maybe it’s something in the water. It’s just that, in terms of corporate enterprise, I can’t think of much else Scandinavia churns out except fish and Volvos.

Mike: Doesn’t matter. In fact, I hear that the success of Nokia and Ericsson is causing a run on built-in saunas in Silicon Valley--I guess they want to see if it’s perspiration that leads to inspiration.

Jim: Anyway, Nokia and Ericsson are fighting the wireless-phone battle with the likes of Motorola and Samsung. Nokia has the biggest chunk with about 27% of the global market and annual sales topping $20 billion, depending on foreign-exchange rates.

Mike: But its stock currently trades at a discount, in terms of price-to-earnings multiple, to its rival Ericsson. Some people think that makes Nokia a buy, and I agree.

Jim: I’d buy Nokia, too, but my reasons are more mundane. Quarter after quarter, year after year, Nokia has demonstrated the ability to sell quality phones that consumers want, and consumers want wireless phones more than ever. This is an exploding industry. Moreover, Nokia does well even though the price of phones keeps falling.

Mike: That’s because the cost of the technology falls even faster. You know, last week we talked about Palm, the maker of those little hand-held electronic organizers. The tiny display screens on Nokia’s phones make Palm screens look like 36-inch TVs. But Nokia and its rivals are packing so much more technology into those little handsets that the wireless phone is bidding to become an indispensable appliance of daily life.

Jim: You’d think it was already, judging by all those morons who make phone calls in restaurants and movie theaters.

Mike: Now, there’s a trend we can count on getting worse. There are expected to be 1 billion wireless subscribers globally by 2005. And a big share of them are going to be talking into Nokia phones, which by then might be implanted in their fingernails or hairpieces or who knows where.

Jim: That’s not all. Even though the whole pie is growing--by that I mean the wireless phone market--Nokia keeps grabbing a bigger piece. Prudential Securities recently noted that Nokia’s market share rose 4.5 percentage points last year.

Mike: In fairness, though, this is not a cheap stock. It’s price-to-earnings multiple is around 80 now, or more than twice that of the broader stock market.

Jim: I know, but when I look at Nokia’s record, I believe the company will generate the growth to support that level of valuation. Another thing to keep in mind: Nokia has an excellent balance sheet with little long-term debt. That gives the company the financial horsepower to keep developing better and better phones.

Mike: There’s another aspect to this stock: Nokia last week announced a 4-for-1 stock split. That won’t change its price/earnings multiple, of course, but it’s possible the split will give the stock an extra kick.

Jim: Like this stock needs another kick. In the last five years, Nokia’s stock has soared 21-fold, while the bellwether Standard & Poor’s 500-stock index has jumped about 170%. If you want to own a strong stock in a thriving industry, dial Nokia’s number.

Whole Foods Market (WFMI)

(MIKE: Don’t Buy)

(JIM: Don’t Buy)

Mike: Now we leave the world of wireless signals zooming through the atmosphere and come crashing back to Earth--and I do mean Earth! This company serves people who don’t seem to want even water sprayed on their food, much less preservatives, or genetically manipulated ingredients.

Jim: Right, these aren’t shoppers looking for oversized tomatoes invented in biotechnology labs. Whole Foods is a natural-food supermarket chain that started with one store in Austin, Texas, in 1980.

Mike: Doesn’t every chain have to start with one store somewhere?

Jim: Geez, I’m just trying to relay a little history here.

Mike: I know, but I’m never impressed when chains get all nostalgic about how they started with one store. I mean, IBM started with one computer, right? Before Xerox could build 1,000 copiers, it had to built the first one, right?

Jim: Are you finished? Whole Foods currently has 107 stores in 22 states and annual sales exceeding $1.5 billion. It’s been expanding rapidly, not only by opening new stores--incidentally, it moved into a vacated Ralphs in my neighborhood--but also through acquisitions.

Mike: Yep, one chain it bought was Mrs. Gooch’s, which had several stores in Southern California.

Jim: Whole Foods also gets good marks for smartly displaying and merchandising its wares, operating immaculate stores and providing good service. And it’s one of the biggest players in its niche--stores that cater to natural-food lovers.

Mike: All that being said, Jim, isn’t this just a supermarket by another name? Now I know my record with supermarket stocks is, well, not worth recalling. But my question is whether Whole Foods is a “story” stock and whether that story has much longer to run.

Jim: I’d say the long-term outlook for that business expanding in any sizable way is only 50-50, and that’s one reason I wouldn’t buy this stock. A way around that, of course, is to buy up the other players, which is what Whole Foods is doing, because the business of natural-food stores is highly fragmented. That means many of the players are mom-and-pop outlets.

Mike: You’re right, and I wouldn’t buy the stock, either.

Jim: I have other reasons to be bearish on this stock. Tops on the list is that Whole Foods’ earnings have disappointed Wall Street in some recent quarters, partly owing to snags in digesting some of its newly acquired stores. That’s triggered sharp, albeit temporary, drops in the stock price.

Mike: That’s not all. Its profit margins, though steady, aren’t much higher than you’d find at Albertson’s or any other supermarket.

Jim: True, somewhere between 2 and 3 cents on the dollar. But to Whole Foods’ credit, its same-store sales--those of stores open at least a year--are posting gains of 7% to 8% year over year, and that’s admirable.

Mike: Look, in an organic nutshell, this is the grocery business we’re talking about. How long do you think it’s going to be before your local Vons or Ralph’s opens up its own natural-food department, if it hasn’t already? And how long before they move that department from the back of the store to the front, assuming the natural-foods craze persists?

Jim: Well, haven’t natural foods been around a while?

Mike: Yes, but they’re increasing in popularity, which is to say, they’re becoming a fad. (Now if that statement doesn’t get me angry e-mails and phone calls, I don’t know what will.) But the fact is, people are increasingly conscious about what goes into their food, and many are asking for non-manipulated, non-irradiated food.

Jim: Isn’t that good for Whole Foods?

Mike: Yeah, but it’s also why those what--unnatural supermarkets?--are going to jump in with both feet, giving Whole Foods a whole lot of problems.

Jim: I simply think that Whole Foods needs to post some consistently growing quarters without those hiccups it’s experienced lately. Those hiccups, by the way, have resulted in Whole Foods’ stock chart looking like a roller-coaster--up last spring, down last summer, up last fall and winter, now down again.

Mike: Sort of like my biorhythm charts.

Jim: Which is too bad, because over the last five years Whole Foods’ stock has outperformed the S&P; 500. Not too shabby. But most of Whole Foods’ gain came before 1998; it’s been that up-and-down story ever since.

Mike: Also keep this in mind: This is a niche market, excuse the pun, and it’s an economic niche as well. Whole Foods does not open stores in South-Central Los Angeles. Whole Foods opens stores in Costa Mesa and Marin County. Its sales per square foot are double those of an average supermarket, in part because it sells to those regions willing to pay high prices for some perceived value.

Jim: Which makes you wonder why their profit margins aren’t considerably better than the average supermarket chain.

Mike: That’s a good point. Probably one reason is that they plow lots of cash into store ambience and into its sales force. This is a decidedly upscale operation.

Jim: Well, so are Saks and Nordstrom. That doesn’t by itself mean they’re bad stocks.

Mike: It doesn’t? How’s Nordstrom’s stock been doing lately?

Jim: Badly, to be honest.

Mike: Uh-uh. My point is, an investor has to look hard at these kinds of chains, and to ask themselves how much further can the stores concept be expanded?

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes .com) covers the markets and corporate financial trends. Hiltzik ([email protected]) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

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