We've taken Nokia's call

The Motley Fool started as a newsletter and has become one of the most popular personal finance websites. Anyone who follows its philosophy is called a 'Foolish investor'

The Motley Fool started as a newsletter and has become one of the most popular personal finance websites. Anyone who follows its philosophy is called a 'Foolish investor'

ere at the Motley Fool, we've considered Finnish mobile telephone giant Nokia as a possible candidate for our real money Rule Shaker portfolio several times. We judged the company according to our Rule Maker rules a while ago, and it came out rather well. Rule Makers, don't forget, are the companies that dominate their industries, leading from the front and establishing the rules that others must follow.

Nokia is the world's leading maker of mobile phones, and always seems to be the first on the block when new technology comes around. We know Nokia doesn't just make telephone handsets and is also involved in other aspects of mobile telephony infrastructure, but it is through the apparent market lead in handsets that it achieves possible Rule Maker status.

So why, if Nokia scored well, did we not buy shares in it when we first conducted our analysis? The reason is that we were divided over whether people buy phones or connection packages. Do people really buy Nokia, or do they buy Vodafone, Orange, or whatever? At the time, pay-as-you-go packages were gaining in popularity too, and they compete largely on pricing. In fact, looking at the pre-Christmas sales period, Orange sold more pre-pay packages than any of its UK rivals. Is it any coincidence that Orange was the only one with no minimum credit top-up requirement? We think not.

So we waited and thought some more, which is never a bad thing for a Foolish investor who is not quite certain what to do. Rushing into investments without sufficient confidence is a very risky practice indeed.

And then Nokia's full-year results for 1999 were released, and we were impressed by what we saw. The headline figures showed annual sales had grown 48 per cent since the previous year, net profit was up 47 per cent, and earnings per share had improved by 50 per cent. Now, with hi-tech start-ups and internet dot com companies springing up everywhere, tales of high growth in sales are nothing unusual. But these are small companies, and it is relatively easy to lift sales by an impressive percentage if that percentage only equates to a few tens of thousands of pounds. But Nokia is a big, mature company, and that 48 per cent growth is equivalent to an additional sales value of £3.7bn.

But high sales and profit growth isn't enough to mark a company as a Rule Maker, and it comes back to the question of whether Nokia's phones are any more desirable than those of other manufacturers. Is the company just a commodity box shifter, or do its products confer some sort of sustainable advantage on it?

A way to examine that is to look at the company's record of repeat purchases. That is a very important Rule Maker criterion; we want companies that inspire regular repeat purchases, and whose products are aimed at the mass market. It's no use selling only to selected high-end customers, or just selling products that people buy once in their lifetimes. That might make a good business, but it doesn't define a Rule Maker.

So we examined Nokia's results a little more carefully, and what did we find? A full 40 per cent of all handset sales in 1999 were repeat purchases. So four out of every 10 phones that the company sold went to people who were upgrading an older Nokia phone. That sounds like pretty good customer loyalty to us, and we doubt very much if any of Nokia's competitors is capable of such a high level of repeat business. So maybe these Nokia phones are a cut above the average after all.

But will these impressive sales figures continue to grow? Over the next couple of decades, we are going to see a succession of new generations of increasingly sophisticated, increasingly user-friendly and increasingly fast hand-held telecommunications devices. As the leading manufacturer, Nokia is well placed to capitalise on this endless series of upgrades and we've seen just how powerful repeat purchases are for the company.

So we have bought some Nokia shares for our Rule Shaker portfolio, and we intend to hold them for the long term. But don't blindly follow us; remember to do your homework and make your own decisions for your own reasons.

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