Market woes drag down handset vendors: Timing, ahead of holidays, ‘could not be worse’

As stock indices fell sharply today, the selling sent the shares of many leading wireless handset vendors down to well below their prior 52-week low.
At the same time, wireless industry analysts projected a tough fourth quarter as consumer spending – particularly in the United States – is projected to fall on worries about the economy. That is particularly ominous news because consumer spending has propped up a limping economy for the past year.
The global crisis in the financial sector comes at the start of the wireless industry’s critical fourth quarter, just as many vendors launch ambitious smartphones and touchscreen devices based on ramping sales in those categories.
Thus the market slump and decline in consumer confidence comes at the very worst time for the industry. But several analysts remained optimistic about most vendors’ long-term health, while cutting earnings and volume estimates. Carriers seeking to increase subscribers’ data spending are aggressively subsidizing many smartphones to entice reluctant consumers, analysts reported.
A question now lingers: To what degree will consumers specifically cut back on buying replacement handsets, now that the devices are perceived as a “must-have” for daily life?
Investors registered their view by selling vendors’ stock.
A selloff in handsets
Nokia Corp.’s stock traded at $16.35 by midday, down nearly 8% from its Friday close; Nokia’s prior 52-week low had been $17.22. Motorola Inc.’s stock traded at $6.15, down more than 9% from the prior close; the company’s 52-week low had been $6.52. Research In Motion, Ltd.’s stock traded at $56.17, down more than 7%; the prior 52-week low was $60.03.
Nokia, with about 40% global market share, is the handset industry’s bellwether company.
Global Crown Capital L.L.C. analyst Tero Kuittinen last week cut fiscal year estimates for Nokia’s earnings “to reflect our expectation of a major consumer spending slowdown that is now finally affecting handset sales.” European consumer spending had already slackened in September before headlines trumpeted the financial sector meltdown, Kuittinen said.
“The timing here could not be worse,” Kuittinen wrote in a note to investors. “September is the key month of the third quarter and the period when phone sales begin ramping up towards Christmas season.”
The contraction in European consumer spending, however, is not yet mirrored by U.S. spending data, according to Global Crown Capital.
“It seems that European consumers are reacting more strongly than their placid American peers,” Kuittinen said.
But Kuittinen’s colleague, Pablo Perez-Fernandez, appeared convinced that Americans, too, would hold off purchases, effectively lengthening the replacement cycle and dimming many companies’ holiday prospects.
“All signs suggest that consumer spending is slowing to a crawl and handsets are no longer immune,” Perez-Fernandez wrote last week. “Over the past two years there have been several false alarms about the health of the phone market, but in our view this cat just lost its ninth life… We believe we have hardly seen the beginning of negative revisions for handset and smartphone growth for 2009.”
UBS analyst Maynard Um said his company had declared a new global GDP (gross domestic product) for 2009 of 2.2%, below the threshold for declaring a global recession, and 3% growth for handset volumes next year. Um lowered his estimates and price targets for the leading vendors as well.
“From a stock perspective, the remainder of 2008 is likely to remain tough for U.S. handset-related names,” Um wrote today.
Qualcomm Inc. will weather the storm better than most and still rates a “buy,” Um wrote, while he rated Palm a “sell.”
As for the smartphone sector in particular, which had been set to explode, analyst Ittai Kidron at Oppenheimer said today “we are cutting our smartphone forecast, taking a more cautious approach given the macro environment.”
“We continue to anticipate robust smartphone growth, though at a slower pace, driven by strong carrier promotional activity and aggressive product road maps,” Kidron wrote. “We continue to find RIM, Apple, HTC and Nokia among the best positioned in the longer term.”