And like many industries, it’s difficult sometimes to determine what is and is not a telecommunications company. There are the traditional telephone companies like AT&T Inc. (NYSE:T), but because they also provide phone service, cable companies can also be considered part of the sector.
This article will focus on the dominant subsection of telecommunications, the wireless industry. It will compare the attributes of two European companies with a global presence, one that manufactures wireless equipment and the other a service provider.
Based in Finland, Nokia Corporation (ADR) (NYSE:NOK) manufactures mobile devices. Vodafone Group Plc (ADR) (NASDAQ:VOD), which is headquartered in the United Kingdom, provides voice and data communications services for consumers and enterprise customers, with a significant presence in Europe, the Middle East, Africa, the Asia Pacific region and the United States.
Market valuations: Nokia Corporation (ADR) (NYSE:NOK) trades at a price to book ratio of 1.17. Vodafone Group Plc (ADR) (NASDAQ:VOD) has a current price to earnings ratio of 14 and a price to book ratio of 1.35.
Recent stock performance: Nokia is trading at about $3.25 a share, roughly where it was at a year ago. Since then it has fallen to a low of $1.63 in July, and risen back to a 52-week high of $4.90 on Jan. 23. Shares of Nokia have been in a steady decline since hitting $40 in November 2007.
Vodafone Group Plc (ADR) (NASDAQ:VOD) set a new 52-week high of $30.80 on April 29. Shares plummeted about 50% from $32 in May 2008 to $16 in early 2009. Since late 2010, the stock has hovered in the $24 to $30 range.
Analyst opinion: Most analysts are down on Nokia Corporation (ADR) (NYSE:NOK) stock, with three sell ratings and eight underperform ratings. Another eight rate the stock as a hold, while two have buys and one lone analyst believes Nokia is a strong buy. Vodafone Group Plc (ADR) (NASDAQ:VOD) is not as widely followed, with three of its four analysts calling it a buy or strong buy, and the one other rating it a sell.
Recent earnings report: European companies do not report full earnings on a quarterly basis. Instead, they provide full financials on a half-year basis with less detailed interim statements during the other two quarters of a fiscal year.
Nokia Corporation (ADR) (NYSE:NOK)’s first quarter interim financial report includes a 20% year-over-year drop in sales. It reported a loss of 0.07 euros per share, an improvement over the 0.25 euros per share first-quarter loss in 2012. Sales have fallen each of the last four years, from $58.72 billion in December 2009 to just under $40 billion last year. While the company booked net income of $1.28 billion and $2.46 billion in 2009 and 2010, respectively, it has suffered sizable losses the last two years; $1.5 billion 2011 and $4.11 billion last year.
Vodafone Group Plc (ADR) (NASDAQ:VOD) reported a fiscal year six month report for the six months ended in September 2012, at which time the company reported a 7.4% drop in revenue and a 2.2% gain in operating profit on a year-over-year basis. Sales for its last four fiscal years were $58.8 billion in 2009, $67 billion in 2010, $73.74 billion in 2011 and $74.35 billion in 2012. Net income was $4.41 billion in 2009, $13.03 billion in 2010, $9.88 billion in 2011 and $11.14 billion in 2012.
Management effectiveness: Over the last five years, Vodafone Group Plc (ADR) (NASDAQ:VOD) has averaged annual a return on assets of 1.5%, a return on investments of 1.9%, and a net profit margin of 5.1%. During the same period, Nokia has averaged a return on investments of 1.6%, return on assets of 0.7% and net profit margin of 0.6%.
Balance sheet: Nokia Corporation (ADR) (NYSE:NOK)’s debt is equivalent to 70% of its equity. The company has a fair amount of liquid assets, with a current ratio of 1.4 and a quick ratio of 1.1. As of the end of December 2012, it sat on nearly $12 billion in cash, with just under $7 billion in long-term debt.
Vodafone has a better debt-to-equity ratio of 0.51, but not the same level of liquidity as Nokia, with both a current and quick ratio of 0.7.
Dividend and yield: Vodafone’s current annual dividend of $1.02 yields 3.3%, which is about what it has averaged over the last five years. Nokia currently does not pay a dividend.
Below is one exchange traded fund that features Nokia Corporation (ADR) (NYSE:NOK) and Vodafone:
iShares S&P Global Telecommunications
This fund corresponds with the S&P Global Telecommunications Sector Index, which measures the performance of companies that Standard & Poor’s. It holds 39 stocks, with Vodafone Group Plc (ADR) (NASDAQ:VOD) its third largest holding at 11.9%. It has an expense ratio of 0.48%. The fund has returned 11.21% year-to-date, 16.73% over the last year, 11.90% annualized over the last three years, 2.3% annualized over the last five years, and 8.9% annualized over the last 10 years.
Given Nokia Corporation (ADR) (NYSE:NOK)’s struggles over the last few years, many are skeptical about its future success. Additionally, strong competition, including Apple Inc. (NASDAQ:AAPL) and Research In Motion Ltd (NASDAQ:BBRY), could prove to be an insurmountable challenge. Vodafone, on the other hand, has room to grow, as it is a data provider, and could potentially look to expand into developing countries. With analysts upbeat, a better yield, and a decent valuation, Vodafone looks like the better choice here. However, as always, the final decision depends on your portfolio, risk tolerance, and personal preferences, and the ETF is always a great alternative for those who do not want to choose a specific company.
The article Telecom Showdown originally appeared on Fool.com and is written by Daniel Murray.
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