 Good day, fellow investors. We have recently analyzed the tire sector, the bridge stones, the Pirelli's, Nokia's. And in this video, I want to discuss one stock that I picked as the stock from the whole sector that I will focus on and do a deep dive. I'll discuss the company, it's Nokia. It's not Nokia, it's Nokia. Another Finnish company coming from the same city has been off from the same company, Nokia, but that makes winter tires mostly. So I'm going to give you an overview of the company, the investment thesis. The stock price has declined significantly over the last year and a half. The whole sector is a little bit in a downturn and you can read the whole sector analysis. I'll put the link in the description below to my report, to my Excel file about the sector, to my Excel file with all the stocks, with all the fundamentals that if you like those numeric part of investing, you can watch that and see where I got the estimations and evaluations. In this video, I'll make more of a story-like approach to Nokia, the numbers for those who are interested, as said, can check in the link description below. And then I'll give you also four investing lessons that we can take from this story. So let's start with the story and then go to the lessons whether this is something for your portfolio that is something you will see at the end of the video. So let's start with Nokia and investment analysis. So just a year and a half ago, the stock price was doing really, really good. Even two years ago, almost at 40 euros now, it's down to 24 and 20. So significant hit over the last year, coming from the slowdown in the automotive industry and consequently also slower tire sales. On a business overview, they sell tires, mostly winter tires in Nordic countries, Russia, Eastern Europe and the United States. So practically, this is a four country business, Finland, Sweden, Norway and Russia and they have really good market shares there and they're now trying to expand into North America and Central Europe. And the difference is that when they expanded in Russia, they were the first, there was a growing market but now to expand in North America and Europe, they have to take away market share from others. Nokia's production capacity is not fully utilized. They have a production capacity in Finland, four million tires per year, but they are saying that they will give long holidays to workers. So if you are a worker there, you can expect 2020 to be a very sunny year because you'll spend it mostly on the Mediterranean, I think, or I don't know where people from Finland go to holidays. Russia, the capacity is 70 million tires, but also not fully used and they're now building a new factory in Dayton where they will be able to produce four million tires. So they are really targeting growth and expansion and investing in that expansion that as we have seen from the stock price, the expansion and investments came at the wrong point in time because we are going into a slowdown in the automotive market. Now let's take a look at the global sales vehicle overview, long-term trend and short-term trend that will give you an overview of where Nokia is playing. What's the playing field there? The growth rate when it comes to the market for tires is not amazing, one, 2%, only China is expected to grow 7% given the still low automotive base there, but even Russia, 2% growth, they expected 6% growth per year thanks to cyclicality in Russia, but after 2008-19 have passed, the actual growth in Russia was minus 2%. So that was a hard hit for the company because they expected 6% growth. This is from the capital day 2018 presentation in October of 2018. Also vehicle sales in the United States have been flat and at the risk of a slowdown because all of the zero interest car loans, the financing, the subprime car financing is coming to an end and it's not yet time to buy new cars and therefore the market has been weakening. Number of cars sold worldwide, this is from Statista, stable, so not really growing there, so not really a growth market. However, the number of cars is expected to reach 2 billion, number of cars on the road is expected to be reached 2 billion in the future, currently is around 1.3 billion and it was for example half of that 670 million in 1996, but Bloomberg gives a number that we are past the peak with global passenger vehicle sales trailing 12 months, adding into 2019 that Statista didn't show, there has been a significant decline in new car sales, so a real, real slowdown for the whole sector. As Nokia sells replacement tires, when you buy a new car, you need after a few months to when winter comes, you need to buy new winter tires, so it is a replacement, but it's strongly correlated to the automotive industry and new car sales. The outlook for the industry isn't really, really so strong and when you invest in such businesses, you have to look, okay, they did grow in the past, but what was the reason for that growth? Was it a strong market? And in this case, we see there was a strong market, especially since 2012 in the European Union that benefited Nokia and tire sales, but the market isn't that strong anymore and since the last quarter of 2018, exactly when their positive outlook was made on the capital markets day, the sales have actually been declining and this leads to different risks for Nokia, especially as their outlook has been very, very positive. So they are entering the next phase of growth. They hope to increase sales by 50% in Central Europe over five years, double their sales in North America over five years and increase the sales of heavy tires by 50% over four years and keep the rest of the market shares that they have in the Nordic countries and Russia stable. And if I put this into a numeric perspective, if they grow 50% in Europe, if they double their sales in the United States, then I have to add 200 million, 200 million, then 100 million from sales from heavy tires, thus their estimations for growth should add 500 million in sales over the next five years or grow 5% per year. That's already lower than the 8% that they did in the past. However, they have been investing heavily, they will invest heavily, but the growth in the market that they expected might not come and this is the uncertainty also hitting the stock price. Also in Russia, they expected huge growth, but that actually didn't happen this year. Perhaps it will happen in the future, perhaps it won't. And this is the investment scenario you are looking at when it comes to Nokia. Usually a company makes decisions based on the past and future expectations. In this case, Nokia really did well in the past as the automotive industry sector wasn't having very positive tailwinds, but now we have huge upfront investments in the new factory, new distribution channels growth and a retraction in the market. That could really put pressure on margins and put pressure on the most important thing when it comes to this company and that's the extremely high dividend. If we look at the earnings, those have been very positive over the last 10 years. Even the last 12 months have seen earnings of three euros per share, two euros per share. So we are price earnings ratio of eight. They have a high dividend payout ratio that leads to a 6% dividend yield. However, the capital spending has been high and is expected to still be high in the future and the free cash flow is negative. If the management continues to show the conservativeness that they have been showing over the past without taking too much debt, they might have to cut the dividend and the dividend cut is never priced in and if that happens and if there are lower earnings or perhaps even a year with no earnings, which is completely normal for a cyclical industry, then you might see the stock continue to fall, fall another 30, 40, 50% and here we come to the investment outlook. By looking at their past earnings, their future expected growth, that might happen in five years, might happen in 10 years, the average earnings per share are 1.94 over the last 10 years. If I assume 25% growth over the next decade, the average earnings might be 2.5 going forward. So a good buying price, if you wish, for a 10% return over the next 10 years is 25 euros. Therefore, this is a good stock, good investment and if they reach the 10% return, that's an excellent investment. If you wish for a 15% return, if you have more patient, then the buying price should be 16.6 euros. It is unlikely that it will reach that, but it might. You never know what will be the factor combination that might influence the stock price, like a recession in Europe, dividend cuts, delays at Dayton or who knows. I've read some analysts reports on Nokia and some analysts from investment banks see the stock target at 36 and no structural change in the whole environment. Well, that is something you can never know beforehand. If there is a recession in Europe, in Russia, there will be a structural change in the environment and simple car sales, tire sales will be lower and that will impact Nokia and especially giving the higher capital investments that they have invested in growth while the markets don't grow. That's something that really changes the story here, but the growth as the global economy goes on will come someday and that is also what creates an amazing opportunity if the stock price continues to decline. This is also a good story to discuss four investment lessons and the first is catching a falling knife. So, Nokia has clearly been a falling knife for the past two years almost and the question is, okay, how am I going to catch this? How to catch this falling knife? How to invest in these stocks? Well, especially cyclical stocks are always like that. They go up because investors always estimate good things to continue in perpetuity and then they go down because investors estimate bad things to continue in perpetuity. However, at some point, the cycle turns, both the positive and the negative and at some point, Nokia, given the low debt, given the quality of the business, the distribution, at some point, it will rebound. How to know when to catch such a quality falling knife? Well, you simply have to look at the fundamentals and what you are looking when it comes to a stock. As said, we have the 15% return, the 10% return, the 20% return and then compare it to all other options that you have on your watch list. The second thing I want to discuss is past growth versus future growth. Nokia really did grow very, very well in the past thanks to the tailwinds in Russia. Number of tires sold in Russia went from 25 million to 40 million, so almost 50 million, so that's really a tailwind. And now the question is, will they be able to grow in the future the same way like they did in the past? They already lower down to 5% the expected growth, but they are now entering markets that are saturated and all other competitors also have a available capacity to increase production, so it will be a big cost fight in the markets they are entering, and that's questionable. They are growing, but I don't know whether it's smart for them to grow into new markets, whether it will be expensive or not, especially if there is no automotive market growth tailwind. So the key is always to look, okay, this is what pushed the business up in the past, but how likely is that it will continue in the future? If the business has a mode, competitiveness, something that differentiates it from everybody else, then it's likely that it will continue in the future. Nokia is selling tires, competitiveness, brands, it's difficult to estimate, therefore it's a normal cyclical stock and should be priced that way. The business is good, the business quality, which is also something you have to analyze when it comes to investing. It's unlikely that Nokia will go bankrupt. They have history, they have good R&D, good distribution center, operating in good countries, so it's unlikely that it will ever go bust, and this is something that also makes it easier when it comes to investing. If you simply invest in businesses that will not go bust, you save yourself a lot of portfolio pain. The third lesson that is crucial when it comes to investing, a dividend cut, and there is the possibility that there will be a dividend cut for Nokia is never priced into a stock price. So you can see the dividend 6%, many in Finland consider it a blue chip, a safe dividend, a safe stock. However, given the scenarios that I have shown, we don't know whether it will be cut or no. It is likely that it will be cut, and 6% also says that many in the market think it will be cut, but when it is actually cut, then panic comes in, then people don't know, okay, they have been holding for that dividend, holding their value estimations on that dividend, and when that is cut, then panic comes in, and it's easily that the stock falls to 16. So one thing to remember, a dividend cut is never priced into a current stock price, especially if the dividend is stable, never ever. When the dividend is cut, the stock goes down. And also something number four that we already discussed, past growth doesn't mean future growth. Always look at what was the reason for growth, how it impacts the business, and what is the likelihood in the future. So thank you for watching. Don't forget to read the reports if you fancy reading and going in that into the sector analysis, or getting a comprehensive picture from where this research video comes from. Don't forget to subscribe to the channel, comment, like, subscribe to the free investing course that I'm starting to build also in the link in the description below. And if you want to check my portfolios, check my stock market research platform. Thank you and I'll see you in the next video.