Intel acquiring McAfee

the announcement

Last Thursday INTC issued a press release and held a web news conference announcing that it had reached an agreement with the board of directors and top management of McAfee to acquire MFE for $48 per share in cash.  This would be a total of about $7.7 billion, or $6.8 billion after subtracting the cash MFE has on its balance sheet.

Assuming regulatory and shareholder approval, the merger could be completed before the end of this year.  Presumably, the two firms are aiming to have this happen, to save the effort and expense of producing a superfluous, pre-merger set of audited accounts.  Senior management of MFE have agreed to stay on at INTC for an unspecified period of time–probably at least a couple of years–operating as a more or less autonomous unit and reporting to one of INTC’s division heads.

the numbers

MFE rose almost 60% on the news, to $47 a share.  INTC fell about 3%.  To me, this looks like ordinary risk arbitrage activity, making a statement that no other bidder is going to emerge (I can’t imagine who would) and that the deal will face no real obstacles to completion.

Over the past five years, cash generation at MFE has been growing at about a 15% annual pace and now stands at a what I estimate to be a touch over $3 a share annually.  There are enough unusual non-cash expenses charged against operations that net income is only about 40% of that.  But because earnings are so unreflective of cash flow, I think they shouldn’t be the standard used in evaluating whether the acquisition makes financial sense.

MFE has no debt and about $2 a share in working capital, a quarter of that in cash.  Net of cash, the acquisition cost is $46 a share.

INTC says that, ex unusual items, MFE will be accretive to INTC earnings immediately.  This is at least in part due to the fact that MFE’s profits will replace interest income on the cash deposits INTC will use to pay for the MFE shares.  At today’s rates, that income has to be very close to zero, so being accretive right away isn’t saying much.

Let’s assume I’m correct that current MFE cash generation is about $3 a share and is growing at a 10% annual rate (given competition in the internet security business, that may be high).  Let’s also say that the appropriate rate to discount MFE’s future cash flows back into the present is 5% (that’s probably too low, but its halfway between the zero INTC is earning on its cash and the 10% it would cost the company to issue new stock).  On these assumptions, it takes MFE about ten years to pay for itself.

That’s a long time.  So the rationale for the acquisition can’t be that MFE stock is really cheap.

INTC’s reasoning

Continue reading

more on equity dividends, a badly misunderstood topic


For the last twenty-five years, dividends have played virtually no role in the thinking of most equity portfolio managers in the United States.

For one thing, the quarter century has been a time of great and rapid technological change–and has therefore presented unusually good investment opportunities.  So there was no need for dutiful managements to return   profits to shareholders for lack of lucrative reinvestment possibilities.

For another, increasing affluence and the rise of discount brokerage meant stocks were becoming accessible to most adults, not just coupon-clipping tycoons.  Baby Boomers were just coming of age and looked to stocks for capital gains.  Boomers simply weren’t interest in dividends then.

…and now

The Baby Boom is nearing retirement.  Age-appropriately, Boomers have begun to shade their investment choices away from pure capital gain toward vehicles that mix in an element of income as well.  At the same time, the domestic economy has matured.  Even before the financial crisis, economic growth had begun a secular slowdown.  In addition, the corporate field has become much more crowded with competition from Asia and Latin America.

As a result of both these developments, many American corporations are beginning to pay significant dividends again.

why misunderstood?

Three interconnected reasons:

1.  The last market cycles in the US where dividends made a real difference were during the accelerating inflation of the late Seventies (dividends were a bad thing) and the early disinflation years of the Eighties (dividends were very good).  Most of the portfolio managers who actually worked in these periods have either retired or are senior executives no longer managing money.

2.  Portfolio management is a craft skill.  You learn by practical experience as the apprentice of a skilled practitioner who is willing to teach, or at least willing to let you observe what he/she does.  Dividends just haven’t come up as a key topic in the training program for a very long time, so (I think) managers under fifty years of age have little clue about how to react to the change in investor preferences I think is going on currently.

3.  Academic finance, surprisingly, has (for a change) some useful information.  But it’s not very much. So you won’t learn about dividends there.   It’s unusual to see a faculty member with any practical knowledge of experience as a professional investor.  It’s rarer still to see a securities analyst of portfolio manager with tenure.  The best analogy I can come up with is that if you want to be a creative writer you don’t learn how by studying to be a literary critic.  But even that’s not quite right, since the literary critic and the writer share common assumptions about the value of the written word.  Finance academics deny that portfolio management is possible.

the Jeremy Siegel op ed article in the Wall Street Journal

I’ve written about this column in an earlier post.  In it. Mr. Siegel, a professor at UPenn, suggests that dividend-paying stocks can be a viable alternative to bonds.

I think the observation is correct and should be relatively uncontroversial.  Of course, I’ve been writing the same thing for months.  But the Siegel article has generated a mini-firestorm of protest  and it has spawned a number of pronouncements “correcting” what the authors consider Mr. Siegel’s misconceptions.

I’ve been fascinated–maybe stunned is a better word–by the counter-articles, which seem to me to reveal the authors’ ground level lack of understanding of what dividends are all about.  I’ve gone back and forth in my mind about whether to link to some examples and have decided, for good or ill, not to.  But careful readers of the Financial Times will have seen a particularly egregious example of what I’m talking about–a rare reversal of form between the FT and the WSJ.

So I decided I’d put down what I consider some of the fundamentals about dividends.

Here goes.

dividend basics

1.  From a credit analysis perspective, common equity dividends (I’m going to ignore preferreds in this post) are riskier than interest payments on the same company’s bonds.  If a firm gets into financial trouble, it can much more easily decrease of eliminate dividends to shareholders than it can interest payments to bondholders.

2.  Most bonds have a specified term, usually ten years or less.  Although the bonds may be far less liquid on a day-to-day basis than stocks, the bondholder will–absent financial problems with the bond issuer–receive his principal back at the end of the term.  Generally speaking, equities have no similar feature.  You may receive more than your original investment if/when you sell, depending on market conditions at the time.

3.  In theory, any company is continually looking for high return projects to reinvest the cash its business is currently generating.  If it can find such projects, it spends its cash on them.  If not, however, rather than  invest in projects where it thinks prospects are at best mediocre or let lots of idle cash build up on the balance sheet, the company should return funds to the shareholders (the legal owners of the company) for them to reinvest elsewhere.

As a practical matter, companies don’t always do this.  Sometimes, shareholders may make it clear to management that they don’t want the money back, that they’re rather have management reinvest even in cases where the returns may not be so high.  Most often, however, CEOs’ egos get in the way of doing the right thing by admitting that industry growth is slowing and that harvesting an investment is more appropriate than sinking new money in.

4.  Dividends are paid out of profits.  Typically, as income rises so too do dividends–unlike the case with bonds, whose coupon payments are typically fixed.

5.  Dividend levels are set by a firm’s board of directors. In well-managed companies, dividends are always backward-looking.  That is, they are set without consideration of possible future profit growth, but only at a level that historical experience says is appropriate.  Dividend increases are only made where there is strong evidence the business will be able to maintain the new payout even in weak economic times.

6.  Although dividend payout ratios are usually expressed as a percentage of profits, I’ve always found the correlation with cash flow to be stronger.

7.  Managements have different levels of skill in the dividend setting process, as well as different levels of commitment to maintaining the dividend during lean times.  As a general rule, firms that have cut the dividend in the past are more prone to do so in the future.

8.   The highest current yield isn’t always the best. It may simply be signalling the market’s belief that the dividend has no chance of growing–or, worse still, that the current payout is likely to be reduced.

9.  Dividend growth prospects count, too.  To my mind, the ideal combination is a stock

–with, say, a 2.5% yield but which is

–a leading firm in a maturing industry, and

–where management recognizes its obligation to shareholders not to continue to expand rapidly but rather to return an increasing amount of the cash it generates to shareholders.

Remember the rule of 72:  a 10% annual grower doubles cash generation every seven years.  A 15% grower does this in less than five.  In a firm like I’m describing, dividends have a chance to grow faster than that.  In the latter case–admittedly not an everyday find–dividend payments ten years from now would be 4x+ the current level, meaning a 10% dividend yield on an unchanged stock price.

state of New Jersey–the latest strange SEC decision

New Jersey is an odd state.  On the one hand, this small but densely populated region contains a famous research university, Princeton.  It generates much of the pharmaceutical research done in the US.  It contains bedroom communities for New York City and Philadelphia, as well as miles and miles of rolling beaches, and the hills, lakes and horse farms in the western part of the state.

On the other hand, its reputation in the minds of many Americans is determined by the HBO series The Sopranos, about an organized crime family operating in NJ; the reality show Jersey Shore, whose “stars” are, ironically, New Yorkers; and a short–but heavily used–stretch of the New Jersey Turnpike that seemingly threads its way through every oil refinery, chemical plant and natural gas storage area in the Northeast. Local politicians have also done their bit to define the state’s character, as they have sued for the right to remain in office, or to run for reelection, while in their jail cells.

New Jersey has been in the financial news recently for another signal achievement–it’s the first state ever cited by the SEC for securities fraud (San Diego, CA has the dubious distinction of being the first government entity to be the subject of an SEC securities fraud action).  The charges, which New Jersey settled in an administrative proceeding this week, are basically that while Jim McGreevey and Jon Corzine were governors, the state continually deceived potential investors in its municipal bonds.  In bond offering documents and in other official state records, New Jersey either misstated or failed to disclose the increasing underfunding of state workers’ pension plans–caused in part by the fact that the state was “balancing” the budget by no longer making contributions to them.

You might think that this is the strange part.  It isn’t.  The really strange part is that in the cease-and-desist order linked in the paragraph above, no individuals are cited for this misconduct–not the governors who knew what was going on, nor the state treasurers who prepared the fraudulent financials, nor the investment bankers whose due diligence was non-existent.  In this regard, Mr. Corzine’s name in particular jumps out to me, not necessarily because his actions were any worse than the others’ but because his long career at Goldman Sachs, including serving as its CEO, make it very difficult to believe he wasn’t completely aware of the relevant securities laws and of the gravity of what New Jersey was doing.

The rationale for the SEC’s inaction–cooperation from New Jersey, which has promised to mend its ways.

The fact that this is not a court proceeding means there’s no judge to evaluate the SEC’s decision.  But it seems to me that this enforcement action–particularly in an apparently simple and straightforward case–reinforces critics (including judges, in court cases) who say that the SEC is a relatively toothless regulator, more interested in fast settlements than in adequate ones.

Government bond market bubble? Wall Street Journal op ed column says Yes

frozen by CNBC

I had turned off my computer late yesterday morning and gotten ready to leave, when I decided I wanted to see how stock trading on Wall Street was progressing.  Rather than wait for my pc to boot up again, I turned the tv on to that financial reality show cum soap opera, CNBC.

Yes, there was the usual cast of buffoonish men and smart women.  They were making lots of inane comments in loud voices, trying at one and the same time to inject meaning and excitement into the random moment-to-moment movement of securities prices as well as to disguise their fundamental lack of knowledge/experience in the markets themselves.

Instead of simply looking at the market data and turning the tv off, I found myself listening with more than one ear to a “debate” about an op-ed column in that day’s Wall Street Journal, titled “The Great American Bond Bubble.”

“Artful’ is probably the word I’d use to describe the proceedings.  A CNBC talking head rambled passionately but incoherently.  Nevertheless, he was framed on the screen in the same group as the third-party bond experts appearing on the show, visually suggesting to the viewer that the Wall Street veterans endorsed his credentials.

One of the guests, a bond strategist from Pimco, said that the fact that the yield on the 5-year Treasury being 1.43% did not mean that bond prices were high.  How so?  …because the 2-year note yields .49% and the 10-year bond 2.63%.  Huh?  The fact that the yields on Treasuries of different maturities are internally consistent with one another says nothing about whether they’re cheap or expensive.   So what this guy said was possible true, but had no bearing on the point.

Another guest strategist–again avoiding the point–said it was outrageous for the op ed authors, UPenn professor Jeremy Siegel and his coworker at WisdomTree fund management, to recommend that investors sell all their Treasuries and buy stocks.

Think what you may about CNBC’s stock market expertise, the channel certainly hasn’t gotten where it is today by focussing on topics investors aren’t interested in.  So though I rarely read the WSJ any more, I thought I’d take a look at the op ed column.

“The Great American Bond Bubble”

The column makes a number of points:

1.  Nominal yields on Treasury bonds are extremely low.

2.  Yields on some inflation-adjusted Treasuries are negative in real terms.

3.  For taxable investors, after-tax returns are even less attractive.

4.  Despite this, investors continue to pour money into bond funds, a state of affairs the authors liken to the Internet stock mania of 1999.

5.  The justification for doing so is that “purveyors of pessimism” (read:  bond fund management companies) assert there are long-lasting “fierce headwinds against any economic recovery”–which the authors compare with the extreme optimism of Internet buffs a decade ago.

6.  Current securities prices–both stocks and bonds–are already discounting the worst possible outcome.  (I may not be doing justice to their argument, but I think this is it.  In fact, what I’m writing may be an improvement on what they say.)  Either the economic situation turns out to be as bad as the pessimists say (think: “new normal”), in which case securities prices don’t move very much; or at the first suggestion that we’ve passed the worst of the crisis bonds fall and stocks rise.

Therefore, “Those who are now crowding into bonds and bond funds are courting disaster.”

7. For income-oriented investors,  “value” stocks, that is, ones with low pe ratios and high dividend yields, are a much better bet.

my thoughts

First of all, it’s important to note that Mssrs. Siegel and Schwartz are both tied to WisdomTree, a fund management company founded by retired hedge fund manager, Michael Steinhardt.  No prizes for guessing what WisdomTree specializes in.  That’s right, value stock and dividend-oriented equity mutual funds and ETFs.  In a feat of linguistic legerdemain, WisdomTree calls its products “index” funds, even though the funds’ contents are selected/weighted according to decision rules devised by Mr. Siegel.  But that’s another story.

Similarly, as I’ve been writing about for some time, bond fund management companies have a similar vested interest in all world economies being pretty awful for an extended period.  It seems to me that this is the only scenario in which bonds, especially government bonds, won’t lose money.  The minute the US economy starts to get back on its feet, the Fed will withdraw the emergency monetary stimulus it is presently supplying and interest rates will rise–sending bond prices falling.  It’s not clear this will be an orderly process, either.

Myself, I think the op ed article makes a good point.  I’m not sure I’d endorse the entire top ten list that Professor Siegel provides.  He is a professor, after all, and not an investor.  I’d prefer companies that don’t have a history of cutting the dividend, as GE did during the financial crisis.  And much of VZN’s cash flow is contained in Verizon Wireless, its contentious joint venture with Vodafone, and therefore not readily available to distribute to VZN shareholders.  I’d also place more emphasis on firms that have been raising the dividend steadily, even if that means accepting a current yield of less than the 4% Mssrs. Siegel and Schwartz cite as average for the names they mention.  So I’d consider INTC, with a 3.2% current payout, or WMT at 2.4%.

There is one big feature that separates bonds from income stocks.  Bonds have a fixed maturity.  If you buy a 5-year Treasury for $1000, then when it matures in 2015 you’ll receive your $1000 back in full.  Not so with stocks.  Their value five years hence could be higher or lower, depending on market conditions.  Just look at the price of any US stock today and compare it with the quote in March 2009 for what is essentially the same economic entity and you’ll see what can happen.

Of course, one might observe that stocks rebounded quickly from this very low level–the yield on the entire stock market was higher than the 10-year bond yield then–and that the last previous instance of such a low was over thirty-five years earlier, in late 1974.  But neither point has made any difference to US investors.

One point is important to realize, however.  The  get-your-principal-back feature applies only to holders of individual bonds, not to holders of bond funds.  The latter are collections of bonds of varying maturities that don’t have a common due date.  So when you redeem your bond fund you have no assurance that you will recover your principal.  If you want your money from a bond fund during a period when the Fed is raising rates, I think there’s little chance of that favorable outcome happening.

For what it’s worth, stocks are subject to two opposing forces during a period of rising rates.  As financial instruments, better returns on a competing instrument (cash) means downward pressure on prices.  On the other hand, the Fed will only raise short-term interest rates if the economy s in good health and corporate profits are rising.  Profit gains tend to push stock prices up.  In the past, stocks have typically made gains during tug-of-war periods like this.

Wal-Mart’s 2Q2011: strong abroad, still suffering from recession in the US

the results

WMT reported 2Q2011 (fiscal 2011 ends January 2011) before the market open in New York yesterday.  The company earned $.97 a share, up 9% vs.  $.89 a share achieved in the same period of the previous fiscal year.  That was a penny ahead of the Wall Street consensus.  The company raised its full year earnings guidance by $.05 to a range of $3.95 to $4.05.  (2Q2010 was originally reported as $.88, but the installation of a new SAP management control software system has given WMT better knowledge of its inventories, resulting in the restatement.)


Three-quarters of WMT’s revenues come from the US.  The other quarter of the firm’s sales, along with virtually all its growth at present, comes from abroad.  The company is very strong in Mexico, and is expanding rapidly in Brazil and China.

Overall sales for the three months for Wal-Mart US were flat for the three months ending July, same store sales down 1.8% and operating incoe doan .2%.

Sam’s Clubs’ sales were up 2% for the July quarter, same store sales (ex fuel) up 1% and operating income up 2.4%.

International sales were up 11% and operating income up 16.8% (on a constant currency basis, both figures would have been about 4 percentage points lower).  Same store sales were up about 6% in China and 3% in Mexico and Brazil.  Japan and the UK were up slightly.

It seems to me that this general picture, aided by cost control, will continue at least for the rest of the fiscal year.

Since Wal-Mart is such a dominant factor in retail in the US, and because about a third of its customer base consists of lower middle class shoppers, Wal-Mart’s US results give some insight to the economic condition of ordinary American residents.

a Wal-Mart’s-eye view of the US

Wal-Mart reported that its business exited the quarter stronger than it began the three months and the traffic was improving sequentially.  But the image the company reveals of its customers’ buying tendencies–Wal-Mart has superb information systems–is one of continuing struggle.

For example, many customers are living paycheck to paycheck.  So Wal-Mart sees a surge in sales on payday, followed by a gradual tailing off until the next paycheck is issued.  Use of food stamps and other forms of government assistance is rising.  Use of the company’s check-cashing services is up by more than 10%.  Credit card usage, now at 15% of sales (30% is about average for retail overall), continues to fall.

Grocery sales are up.  Baking and cooking supplies are, too, as more people shift from eating out to preparing meals at home.  Apparel sales (never a Wal-Mart strength) are down, as are home goods and appliances and electronics.  In other words, necessities are in, discretionary purchases are out.

This may not be a strictly apples to apples comparison.  Wal-Mart performed relatively well during the worst of the recession, helped in part by shoppers trading down from more expensive stores.  Industry evidence is that many of these customers have begun to trade up again.  Still, it’s clear that many Wal-Mart customers are having a very rough time.

Last year, apparently in a bid to woo more affluent customers, Wal-Mart tried two experiments.  It cleared its normally crowded aisles and reduced the number of items sold in many categories–apparently to give a more Target-like look.  It also increased advertising.  Neither experiment worked.  So the company is increasing assortments again, delegating more merchandising authority to local managers and stopping the extra advertising.

On the positive side, Wal-Mart says that after its success in entering the Chicago urban market it has been contacted by a number of large cities asking the company to do the same for them.

the stock

WMT (I own it) is trading at under 13x earnings and yielding 2.4%.  It is generating free cash flow of over $4 billion a quarter and has used $7 billion of that in the first half to buy back stock.  the earnings growth rate should gradually improve, both as international operations become a large part of the whole and as the economy rebounds from the current cyclical low point for Wal-Mart customers.  For an income-oriented investor, I think WMT is way better than a government bond–admittedly more volatile–but way better.

China’s GDP bigger than Japan’s: that’s not the real story

China’s #2…

Yesterday morning, the government in Tokyo announced its June quarter GDP totaled $1.28 trillion, slightly below Beijing’s previously announced $1.33 trillion for the same period.  By surging ahead of Japan, China has become the number two economy in size in the world, after the United States, relegating Japan to third place.

This was headline news in financial newspapers and websites around the world–except for the Wall Street Journal, which carried an article about criminals’ use of underwear with secret pockets in it on its website instead.

…at $5+ trillion of GDP

Annualizing China’s second quarter GDP would mean full-year economic value creation of $5.3 trillion, or a little more than a third of what the US will achieve in the coming 12 months.

Conventional measures undervalue developing countries’ economies

International economists have known for a long time that there’s something wrong with the conventional way of comparing GDPs between countries, however.  It isn’t just that the renminbi isn’t freely traded and might be, say, 15% against the dollar if it were–and that therefore Chinese GDP could be almost a trillion dollars higher than the amount reported.  Nor is it that the yen has shot up agains the dollar by about 10% over the past few months, making Japanese GDP a tenth higher than it would otherwise be.

Purchasing Power Parity GDP

The real issue is that the conventional comparison uses currency market exchange rates to convert GDPs into a standard form (US$).  This is a reasonable way to measure the relative value of sectors whose output is traded internationally.  But it’s not a very good method, especially when dealing with developing countries, to assess the value of economic output in non-traded parts of an economy.  You get a better measure of relative size of economies using purchasing power parity GDP, a topic I’ve written about in detail in another post.

Using purchasing power parity GDP, China had a $8.8 trillion economy in 2009 vs. $4.2 trillion for Japan.  In other words, China is already twice the size of Japan, surpassing the latter six or seven years ago.  The Middle Kingdom is not a third the size of the US, but almost two-thirds as big.  And, on the PPP GDP measure, China will surpass the US to become the largest economy on the globe around 2020, not 2030, as forecasters think China might do using the traditional GDP calculation technique.

the real story

What is the real story then?  It’s that the China GDP story is front page news.  To me, it means that US and Europe continue to underestimate the size of the developing economies, and of China in particular.

Both the IMF and the CIA do purchasing power parity calculations, and come up with almost precisely the same results.  According to both, total world GDP last year was about $70 trillion.  The largest economic entities were:

BRIC countries     $16.4 trillion     (23.4% of the world)

EU          $15.0 trillion      (21.4%)

US     $14.3 trillion     (20.4%)

The Eurozone, that is, countries actually using the €, had GDP of $11 trillion (15.7%) last year.  As mentioned above, China had GDP of $8.8 (12.6%) trillion.  NAFTA had GDP of $17 trillion (24.3%).

conclusion for investors

Looked at from the PPP perspective, the world consists of three large economic blocs, all of about equal size:  NAFTA, BRICS and the EU, in that order.  The BRICs, by far the fastest-growing of the three groups, will probably pass NAFTA this year.

Why is this important?

Investors should realize that the MSCI World Index is constructed using the following approximate country weightings:

US + Canada    45%

EU     26%

Japan     8%

Australia, Korea, Taiwan     7.5%

the rest     12.5%.

That looks an awful lot like the conventional-GDP view of the world.  You get a heavy dose of the US, EU and Japan with the traditional indices, but very little of the really fast-growing 25% of the world.

The EAFE index, the standard international index for Americans, is even more skewed than the MSCI World.  Its country weightings:

Europe ex UK     42%

UK     21%

Japan      23%

Australia  9%

everything else     5%.

Again, a heavy dose of the most mature markets, with little else.

What I’ve just written is substantially correct, but a few caveats are in order.

–Most stock markets in developed countries have a healthy number of multinationals, which have established beachheads in the developing world to benefit from the growth opportunities they offer.  So the skewing away from the developing world is not so severe as the country allocation suggests.

–Some developing markets aren’t open to foreigners, mostly out of legitimate concern that their developed market cousins will buy the nations most prized assets on the cheap–which of course is what we’re trying to do.

–Some developing markets can be highly illiquid, as well as requiring a large amount of local “street smarts” for you to be an active stock picker in.

where to get developing markets’ exposure

There are specialized mutual funds with good track records, like the Matthews China Fund, or ETFs, that can give you the exposure you might want.  Remember, though, that these are higher than average risk/reward investments, so be sure you’re willing/able to assume the greater chance of loss.

Smartphones: haves, hads and have-nots

new cellphone data

A bunch of cellphone industry researchers–Gartner, Nielson, Canalys–have all released data for the June quarter of 2010.  this post is an attempt to put the information into a coherent framework.  Here goes:

almost all the market growth is in smartphones

1.  The global cellphone market continues to grow, by about 14% year over year in the second quarter.  That’s driven almost completely by smartphones, however.  According to Gartner, Inc. sales of smartphones were about 50% higher in 2Q10 than in 2Q09.  Older “feature” phones, which still make up 80% of all units purchased, showed only a 4.5% increase.

Being able to offer an attractive smartphone is the real dividing line between haves and have-nots.  In the case of Korean cellphone company, LG, which has no signature smartphone, average selling prices fell by 27% in the second quarter and its cellphone division lost money.

market share

2.  Market share shifts are the second differentiating factor.


On a worldwide basis (Gartner, Inc. figures) the players look like this:

Nokia     41.2%, loss of 9.8 percentage points

RIMM     18.2%, loss of .8 percentage points

Android     17.2%, gain of 15.4 percentage points

AAPL     14.2%, gain of 1.2 percentage points

Others     9.2%, loss of 5.9 percentage points.

The really stunning figures here are highlighted–the emergence of Android and the precipitous drop in Nokia’s share of the market.

Two other things to note:

–shortages of components, particularly high-end active-matrix OLED screens, may have affected sales a bit

–AAPL ran down inventories of older iPhones during the quarter in preparation for launch of the new iPhone4.  The company estimates that it could have sold an extra 250,000 smartphones, were it not doing so.  That would have only nudged its market share up by about .3%, however, not enough to make a significant difference.

the US

3.  The Neilson Company data for the US show a similar story, with the significant exception that Nokia, with a 2% market share, is a non-factor is the domestic smartphone market.  The market share figures:

RIMM     35%, loss of 2 percentage points

AAPL     28%, gain of 7 percentage points

MSFT     15%, loss of 12 percentage points

Android     13%, gain of 11 percentage points

Others     9%, loss of 4 percentage points

MSFT has announced that it is, at least temporarily, exiting the smartphone market, hoping to reenter before yearend.  While it seems reasonable to assume that some market share loss comes from the announcement, I think the causality goes the other way.  MSFT had been steadily losing market share over the past year, long before it decided to regroup.

Neilson also provides data on the most recent quarterly trends on domestic smartphone purchases.  These data paint a somewhat different picture of the market from the installed base figures above:

RIMM     33%, down 3 percentage points

Android     27%, up 10 percentage points

AAPL     23%, down 4 percentage points

MSFT     11%, down 3 percentage points

Others     6%, down 1 percentage point.

Unlike the earlier data, which show the strong taking share away from the weak, these suggest that Android is taking share from all the others.  The timing of the introduction of iPhone4 may have something to do with this.  If so, 3Q10 data should show an unusual jump in AAPL market share in the US.   Nevertheless, this is something to watch closely.

brand loyalty

4.  These are Neilson figures for the US.

Asked what kind of phone they wanted next,

–89% of iPhone users said they wanted to stick with their brand.

–71% of Android owners want to stay with GOG, with 21% thinking of switching to AAPL.

Only 42% of Blackberry owners, however, intend to be repeat purchasers.  Of the rest, 29% said they’ll switch to iPhone; 21% intend to make a move to Android.

investment implications


I don’t see a good investment case for the have-nots.   Value investors may disagree, however.  And it’s true the LG has been extraordinarily resilient in the past.


Of the “hads”, cellphones are too small to be relevant to MSFT’s profits.  It might be a psychological boost for the stock if the company can demonstrate it can make money at any diversification away from the operating system and office productivity software businesses, though (not something I’d bet the form on).

I was a very large holder of NOK in the Eighties and into the Nineties.  I don’t know the company well any more (that I’m not compelled to make the effort to stay current is a statement in itself).  Despite its early entry, as far as I can see, the company doesn’t seem to be able to get the smartphone market right.  It’s competitive strengths seem to lie in other areas–low-cost manufacturing and established distribution networks in emerging markets.  My big worry is that it still has an awful lot of market share left to lose.  Again, value investors will likely disagree.

RIMM is an interesting case.  Its claim to fame is its secure mobile network for business users.  Recent  public demands from India and Saudia Arabia that RIMM give those governments access to its encripted data streams are a made-in-heaven third-party endorsement of RIMM’s security (remember, too, that the major leagues for the espionage business is corporate spying).  By implication, they say those countries have no trouble hacking into other cellphone networks.

So far RIMM is refusing. There may be an innovative solution to this problem.  At some point, however, RIMM may be forced to choose between its corporate core customers and having access to fast-growing emerging markets.


It’s easy to get tied up in knots about AAPL.  It’s up about 25x from the lows of a half-decade ago and is now a cellphone company that happens to make PCs and other consumer devices.

I feel confident that the 25x is not going to recur.  But the company has only one significant rival, Android, in the smartphone market.  That market is growing by leaps and bounds.  One can easily imagine that smartphones end up being 60% of the overall cellphone market, which would mean a tripling in its current size.  Whether AAPL ends up being #1 or #2, it could at least double its share of the smartphone market over the next four or five years.  In other words, AAPL’s cellphone revenue might well advance 6x over the next half-decade.  I don’t think anything like that is factored into today’s price.

I find GOOG harder to handicap.  I’m not concerned about the ORCL lawsuit over Java.  I also think Android will be very successful.  In baseball, if a manager says during spring training that he has four third basemen it really means that he has none.  Well, I have about four different opinions about GOOG.  I’ll leave it at that.