When a company chases after a new technology, there’s gold in the cast-offs…
The 21st century has been cruel to Nokia Oyj. Over the past decade, the Finnish company has shed thousands of jobs. It sold its once market-leading handset business to Microsoft Corp. in 2013, where things went from bad to worse. It isn’t having much fun selling telecommunications network equipment, either. A poor set of third-quarter results wiped almost a fifth off its market value last week.
But at least one company associated with Nokia is still flourishing, and it’s in a sector you wouldn’t necessarily expect to be a bountiful source of profit: tires.
And it offers a lesson to investors. When a company tells you its future lies in flashy new technology, pause to consider whether there’s still gold to be found in the seemingly out-dated or unsexy pieces it’s casting off.
To recap, Nokia was once a sprawling conglomerate ranging from paper to rubber boots. Following Nokia’s decision to focus on telecommunications, it listed its tire business in 1995 and sold the remaining shares in 2003. As is so often the case with spinoffs, that’s when things got really interesting.
Since they started trading, shares in Nokian Renkaat Oyj, as the tire business is called today, have returned about 12,000 percent, with dividends reinvested. Needless to say that’s much better than the former parent has fared.
What’s the appeal in selling tires? Nokian has industry-leading profit margins due to its focus on expensive winter tires — legislation has made their use compulsory in several countries. Low-cost Russian production sites have also helped, as has the growing popularity of sports-utility vehicles, which require larger tires.
On Wednesday, the company announced a 21 percent jump in third-quarter operating profit, helped by growing demand in Russia and Nokian’s ability to pass on higher raw material prices to customers.
The core passenger car tire unit’s operating profit margin was an astounding 36 percent in the most recent quarter. For comparison, luxury carmaker Mercedes-Benz is content to make a 10 percent return on sales. Nokian’s sales could get a further lift when it opens its first U.S plant in Tennessee in 2020. North America currently accounts for only about a tenth of sales.
Of course, climate change could make snowy conditions less common in the northern hemisphere, hurting demand for winter tires. They account for about 65 percent of car tires Nokia sells. But Nokian thinks there will still be a market for tires that grip the road in coming decades, not least due to an expected increase in extreme weather.
Investors appear to agree. Nokian’s shares price in a glowing future — the stock trades on 20 times estimated earnings, far ahead of peers, including Pirelli & Co. SpA and Continental AG.
Apple Inc. has long since displaced Nokia as a maker of mobile phones, but it hasn’t yet built an car. Nokian’s shareholders will be hoping the tech giant doesn’t think about selling tires instead.