Nokia Targets Motorola in 2007

At a recent investors meeting with Goldman Sachs in Boston, Nokia's CFO Rick Simonson explained to the investment bank that it plans increase pressure on its closest rival, Motorola Inc (NYSE: MOT). The Finnish cell phone company plans to cut its entry-level phone pricing this quarter in a move aiming on stopping Motorola from narrowing the market-share gap between the two companies.

"We would avoid Motorola shares," said Brantley Thompson of Goldman Sachs in a note to clients. "The risk to Motorola shares from here is a drop in market share that is currently not in expectations."

Motorola, the No. 2 handset manufacturer, sold nearly 220 million handsets in 2006, compared to Nokia's 348 million, according to iSuppli. The company said it expects sales between $10.4 billion and $10.6 billion in the first quarter, but pricing pressure from Nokia may make it difficult.

The lower prices could influence more consumers to choose Nokia phones over its rivals, eroding Motorola's market share. In the 2006 fourth quarter, Nokia had a 35.2 share of the global cellphone market versus 21.9 for Motorola according to researcher Strategy Analytics Ltd.

"We believe this presents 5%-10% earnings risks to current Street forecasts for Motorola, assuming a 2 point share reduction [in market share]," Thompson continued.

The risk may be even larger. Motorola’s double-digit operating margin targets in handsets relies on healthy market share of high-end, high-margin phones, a area Nokia may choose to target as well.

Thompson explained that "if Nokia aggressively targets the high end, it could prevent Motorola from achieving its 2H2007 targets."

The firm issued a neutral rating for Motorola on Tuesday.

American Depositary shares of Nokia rose 2.15 percent, or 46 cents to $21.86 in Monday afternoon trading on the New York Stock Exchange.