Compare 2 big nordic mobile companies: Nokia and Ericsson
Nokia (NOKIA SEK) provides mobile and fixed network solutions worldwide. The company operates through four segments: Mobile Networks, Network Infrastructure, Cloud and Network Services, and Nokia Technologies. It focuses on mobile radio including macro radio, small cells, and cloud native radio solutions for communications service providers and enterprises; and provides network planning and optimisation, network implementation, and systems integration, as well as company-wide managed services. It was founded in 1865 and is headquartered in Espoo, Finland.
Telefonaktiebolaget LM Ericsson (ERIC B) together with its subsidiaries, provides communication infrastructure, services, and software solutions to the telecom and other sectors. It operates through four segments: Networks, Digital Services, Managed Services, and Emerging Business and Other. The Networks segment offers hardware, software, and related services for radio access and transport, as well as related services, such as design, tuning, network rollout, and customer support. It was founded in 1876 and is headquartered in Stockholm, Sweden.
The first thing I always want to look at is the ROIC (Return on invested capital). And we want to see it consistently higher than 10%.
Nokia is moving down and fast and has been negative for 6 years so that should conclude the research for Nokia but since we are here we will continue. Maybe we will learn something along the way. Ericsson had a very bad year in 2017 so if we decide to move forward with it we should do more research and know what was the cause. The mean for previous years was something like 6% but after 2017 it seems it is improving year after year and right now it is at 15%. They had a management change 5 years ago so hopefully that’s the cause. If that is the case it is fantastic news, we always like turnaround companies. Why? because of their previous bad results the company stock should be run down and a bargain. It will be a real good investment if they can manage it. But we are getting ahead of ourselves here.
Next we will look for 10% increase in YoY earning.
Nokia is obviously in a very bad situation, they have been going nowhere in the past 12 years. So how are they running the business? More debt and selling more shares probably, they have almost doubled their share numbers since 2014. Ericsson is not a gem either but at least it seems they are trying to hold their ground.
Next let’s look at the revenue and see if that will increase 10% yearly.
Nokia is definitely dead to us at this point, and with a negative net margin we should just move on. But Ericsson has 4% increase over the years, not a gem again but not bad for a turnaround. Its net margin was around 4% before 2015 but now it is going up and is around 8%.
Now let’s look at the free cash flow.
Nokia has the same situation with the FCF, and without FCF how are they supposed to run and expand the business? Ericsson on the other hand is showing turnaround behaviour here too and with FCF to net income ratio of average 1,7 it shows it has better financial situation than its income statement suggests which is always good.
Now let’s check the debt and quick ratio.
Nokia obviously is increasing its debt fast and run the business with it, hoping for some miracle to get the company out of the swamps. They can try, but not with our money. Ericsson debt seems under control, they can pay it off in 2 years. And their EBIT (Earning before income tax) can cover their debt interest easily too (15x).
None of them has problems handling their current liabilities using their current assets so that is good.
What about dividend payout ratio?
Ericsson has been paying too much dividend, but the new management seems to know what they are doing. They have decreased their dividend to a reasonable amount.
To sum it up Nokia is making no money and is going more into debt so we will just forget about it. But Ericsson can be interesting to own, the new management seems are trying to turn the company around and if they can that would be something. So let’s just keep it for now (the B share not the A, if you are interested to have 10x more voting power in company meetings by all means pay the extra premium price and own the A shares).
Thank you for your time and see you on the next story.