Nokia Corporation (NYSE: NOK) shares rose over eight percent today after the company announced spectacular earnings that beat Wall Street estimates. The mobile device maker reported fourth quarter revenues of 15.7 billion Euros versus a consensus of 14.9 billion on sales of 133.5 million mobile devices, up 27% year-over-year and 20% from last quarter. The company also said that it expects a normal seasonal decline in the first quarter, but plans to maintain market share and expand over the next year.

Many investors were shocked by these strong earnings following the poor results posted yesterday by Motorola, Inc. (NYSE: MOT). Nokia showed the opposite story with excellent growth driven by market share gains in Latin America, Europe and Asia Pacific. The company’s mobile phone margins were also at an all-time high at a time when many believe Motorola may cut their prices in order to compete. Earnings estimates for Nokia are expected to be lifted by 5 to 10 percent following this news.

This news is devastating to Motorola shareholders hit with poor earnings just days ago. It is now clear that Motorola’s decline was not the result of an industry slowdown but rather of another decline in market share that could hurt the company. More, the planned price-cutting measures would clearly hurt Motorola more than Nokia given the latter’s strong and improving margins on its mobile phones. Motorola also faces an uphill battle in foreign markets that it has relied on in the past to drive growth.

Nokia does have a little to worry about, however, with the threat of price-cutting. The cellular industry has relied solely on added features, more minutes and other benefits to attract customers rather than pure price-cutting. If Motorola decides that it is the only hope to recover, Nokia and other may have to follow suit. This could spark a price war that could kill margins and hurt all companies involved. Alternatively, if Nokia decides to stay out, they could lose substantial market share.

In the end, this is great news for Nokia and bad news for Motorola. It will be interesting to see how this story plays out over the next few months, but Motorola will need a substantial number of changes in order to turn themselves around in the face of such strong competition.

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Goldman Sachs (NYSE: GS) released an interesting research note on various bond insurers that have seen a spectacular run-up over the last few days. Bond insurance companies make money by providing lenders with insurance that borrowers will make timely payments in exchange for a fee from the borrower. Unfortunately, this great wave of defaults has cost these insurers billions as they are forced to pay out more claims at higher amounts. Recently, some of these companies have come out saying that Wall Street has blown their problems out of proportion. So, how much are they really worth?

Goldman Sachs valued the three largest bond insurance companies under three scenarios. The first scenario (“Run-Off”) is a situation where the insurers won’t raise enough capital to satisfy ratings agencies and may struggle to write new business. The second scenario (“Ongoing Concern”) assumes a capital raise in line with losses with no added book value and a derivative mark-down. And the third scenario (“Bailout”) is a best-case scenario where the firms are bailed out with capital injections sufficient to operate in their current condition.

So, where do these companies stand?

• Ambac Financial (NYSE: ABK)
  • Run-Off: $15
  • Ongoing Concern: $10
  • Bailout: $35
• MBIA Inc. (NYSE: MBI)
  • Run-Off: $6
  • Ongoing Concern: $14
  • Bailout: $48
• Security Capital Assurance (NYSE: SCA)
  • Run-Off: $0
  • Ongoing Concern: $1.50
  • Bailout: $13

Currently, it looks like ABK is trading at Run-Off valuation; MBI is trading at Ongoing Concern valuation; and, SCA is trading at Ongoing Concern valuation. Are these accurate numbers? What are the odds of these companies receiving a bailout? Well, the numbers are somewhat subjective, but a bailout should not be thrown out of the cards – just look at Countrywide. In the end, these companies still face substantial problems, it’s simply a matter of the methods they are able to use to get out of them that determine their valuation!

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Banking stocks have been beaten down to their lowest levels in years thanks to the combination of mortgage and credit problems. It seems like the write-downs on these losses continue to increase every quarter by billions of dollars, which has many would-be investors sitting on the sidelines until the picture gets a little clearer. However, a zealous Federal Reserve issuing emergency rate cuts and a 12% rally on Wall Street has many investors ready to buy now!

The Federal Reserve’s actions are often seen as a precursor to banking stock turnarounds. In the past, an aggressive Federal Reserve, such as the one we are seeing today, that dramatically steepens the yield curve by cutting rates. Unfortunately, we have seen aggressive rate cuts but the yield curve this time is inverted and only moderately steepening – much different than in the past. It appears that banks’ benefit from lower rates is a bit too modest to offset the massive credit problems we’re seeing today.

The real driver behind the growth in the banking sector today is the borrower. Consumer credit is extremely weak these days as they relied on housing prices to increase in order to pay off their debts with longer term debts from other sources – a dangerous cycle. Meanwhile, there is some risk that CRE and corporate borrowers may also soon face problems in the event of an economic slowdown. Many believe that the latter is not yet priced in to the market.

So, who was the big buyer if things still aren’t any better? Well, there is some speculation that hedge funds took the opportunity to close out some of their short positions. There appeared to be a correlation between the top performers and most heavily shorted stocks, although there were some long-term buyers who didn’t want to miss a bottom that likely got in towards the end of the rally. Unfortunately, the bottom is not likely here quite yet as mortgage defaults promise to continue amid a much weaker consumer.

Banking stocks may be cheap now, but prudent investors may want to hold off buying them until they can see the situation with some clarity. However, one of the best banking plays for those looking to take on some risk may be Bank of America (NYSE: BAC) as they have relatively little subprime exposure and recently acquired Countrywide Financial at bargain-basement prices!

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Syms Corp. (OTC: SYM), which delisted its stock in mid-January and plans to deregister tits shares in April, may find itself in court with two activist shareholders as a result. Barington Capital and Esopus Creek Advisors, who collectively own 9.8 percent of the company, sued Syms alleging that its directors broke their fiduciary duty to investors by enabling the company to delist. The activists are also seeking a copy of the company’s shareholder list, presumably to see if others are interested in joining the lawsuit.

“The group believes that such actions will destroy shareholder value,” said Barington and Esopus in a letter to the board. “Since the Company announced on December 21, 2007 that it was delisting and deregistering its shares, the price of Syms’ stock has fallen by over 42%, destroying over $104 million in market capitalization.”

Syms countered the argument by saying that investors will still be able to buy and sell shares on the pink sheets, while the company will save $750,000 per year in costs associated with being a listed company. The company also indicated that management will be better able to focus its attention and resources on continuing to improve operations and enhance shareholder value.

Many shareholders, however, are convinced that the real motive behind the delisting is to lower the stock price enough so that management can complete a management-led buyout at an inexpensive valuation, leaving shareholders in the dust with nothing to say for their investment. There is speculation that this has long been a consideration of store founder Sy Sims.

Barington and Esopus have begun registering their shares in their own name in order to prevent this process. If the company has more than 300 shareholders on record, then it cannot deregister itself without approval from the shareholders. As a result, the two activists are encouraging other investors to do the same before it is too late and the value of their investment is lost.

In the end, this is an interesting story that is worth following. If the activist investors are able to hold off any deregistration, the company may decide that it is best to relist and deal with the costs rather than remain traded on the OTC markets. This may cause a jump in the share price if the stars align. Combined, these factors make SYM a stock worth watching!

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Mortgage insurance stocks have been a rollercoaster ride in recent days amid speculation that some may be going out of business while others would be poised to take over entire markets. Good news from bond insurers led to broad increases yesterday, but bad news beat PMI stocks back down to reality today. The mortgage meltdown is far from over and the future of these companies remains uncertain.

MGIC Investment Corporation (NYSE: MTG) shares hit a 15-year low after dropping more than 30 percent today. The nation’s largest mortgage insurance company announced that paid losses could reach $2 billion this year as it struggles to accurately forecast its losses amid the mortgage meltdown. The company is struggling with not only a dramatic increase in delinquencies, but also an increase in the cost of each claim as fewer delinquent homeowners are resuming payment.

Home buyers typically purchase mortgage insurance from companies like MGIC when they put down less than 20 percent of their home’s value, which makes most of their customers those with exotic mortgages (the ones that don’t require huge down payments). MGIC said it had 107,120 delinquent loans by the end of 2007, which is a 16,000 loan increase from the end of the third quarter. Clearly, there is still trouble in the housing market that is only likely to continue.

The PMI Group, Inc. (NYSE: PMI), another major provider of private mortgage insurance, also saw its shares decline more than 15 percent today after the bad news from MGIC. Interestingly, the stock soared yesterday after bond insurers Ambac and MBIA announced that they don’t expect to pay as much as they expected in claims and that the value of their assets is far higher than the market initially believed. Unfortunately, this may not ring so true for mortgage insurers as compared to bond insurers.

In the end, the mortgage markets are still in freefall as foreclosures continue to rise and delinquencies continue to increase. Mortgage insurance companies made the mistake of insuring risky loans with exotic mortgages, and that decision is likely to cost them going forward. Nobody knows the extent of the damage yet, but it may be wise to stay away from these companies for now!

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Motorola, Inc. (NYSE:MOT) shares fell over 20 percent today after the company posted a disappointing operating loss in the current quarter due to continued weakness in its cell phone business. The mobile device maker warned of further market share losses this quarter and backed off its forecast for its mobile devices division to return to profitability during 2008. Shareholders are now questioning whether the company will be able to pull itself out of its current downward spiral and turnaround its cell phone business at all.

The news is likely to disappoint activist investor Carl Icahn, who has amassed a four percent stake in the company. The billionaire investor continues to insist that Motorola shares are undervalued with the cell phone business showing no value at all. As a result, he contends that the company should spin-off the cell phone business from the rest of the businesses in order to unlock value for shareholders. Unfortunately, now may not be the best time as a turnaround is expected to take much longer.

However, Motorola’s cell phone business may prove difficult to turnaround. They are losing market share, which makes them smaller, which makes them less competitive on costs, which makes their phones less compelling, which loses more market share. In other words, the company is likely to see its margins on cell phones shrink, which may force it to raise prices. This will only cause problems, particularly in our current economic condition where consumers are pinching pennies.

Right now, Motorola executives say they are focused on cutting costs and getting the mobile devices business back to profitability. Meanwhile, shareholders may be beginning to regret not putting Carl Icahn on the board of directors when they had the chance not long ago. For now, they will have to remain content and deal with a dropping share price.

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Sprint Nextel Corporation (NYSE: S) shares dropped over 25 percent last week after the company announced major layoffs of 4,000 workers and the closing of approximately 125 stores in order to cut costs by $700 to $800 million per year. The telecom giant deemed these measures necessary in order to offset the loss of approximately 885,000 subscribers. Now, there is speculation that the company might be on the verge of a price war designed to win back some of its customers from rivals.

Sprint has already taken several steps towards repositioning itself for profitability. New chief executive Dan Hesse has already begun selecting a new management team and put a freeze on the company’s cash-drain WiMax initiative. The telecom giant is also reportedly considering a speed-up of the network migration of Nextel’s iDen users to CDMA in order to pave the way for a potential sale of the iDen Network itself. And finally, Sprint is also reportedly considering an overhaul of its pricing plans in an effort to win back customers that it had lost so quickly to rivals.

The cellular phone industry is a unique one in that it has never experienced price cutting in the past. Traditionally, companies have resorted to increasing minutes and features while keeping the price point extremely fixed. Now that more than 2/3 of all US citizens own a cell phone, competition has become a bit more stiff and price-cutting may be the only way left to win back customers. There is even some speculation that the company could adopt a fixed-rate unlimited-usage program similar to that of Leap Wireless or MetroPCS – a move that would surely upset other large telco players.

Sprint’s botched merger with Nextel has led to a mass exodus of its users to both AT&T (NYSE: T) and Verizon Wireless (NYSE: VZ), which have both shown substantial increases in subscribers over the past year and are expected to show the same later this month. Any price cutting could be as damaging to the cellular industry as it was to the movie rental business – but it may be the only option remaining…

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Getty Images, Inc. (NYSE: GYI) shares spiked nearly 15 percent today after the company announced that it would explore strategic alternatives, including a potential sale of the company. The digital photo service is reportedly asking for $1.5 billion – or $25 per share – and has many analysts speculating as to whether a potential buyer would even be able to obtain financing in this environment. Shareholders are hoping that the move could draw bids from two private equity firms that are reportedly interested.

Getty Images hired Goldman Sachs as its advisor in a process that is set to end by the end of the month. The move comes after the firm’s shares have declined more than 45 percent over the last year due to competition from low-cost rivals. Currently, Getty Images owes most of its growth to recent acquisitions like iStockPhoto.com, which is expected to bring in $83 million in 2008 alone – not bad for a company they bought for $50 million in 2006! The company has also engaged in cost-cutting measures designed to increase its attractiveness, including layoffs amounting to 5 percent of its workforce.

Interestingly, the $1.5 billion asking price would only be an 11 percent upside to the company’s $1.36 billion enterprise value (market cap plus debt less cash). This has some shareholders and analysts concerned that the company is not asking for enough. The attractive valuation has also apparently piqued the interest of Bain Capital – a firm founded by presidential candidate Mitt Romney – and the famous Kohlberg Kravis Roberts (KKR), who are reportedly mulling a bid.

Overall, this is a strong company that is waning slightly in today’s troubled markets. Whether or not any of the discussions will result in a bid remains to be seen, but this is definitely a stock worth following in the meantime!

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IncrediMail Ltd. (NDAQ: MAIL) shares jumped over 20 percent in early trading today after the company announced that Google Inc. (NDAQ: GOOG) agreed to reinstate the advertising agreement between the two companies. The e-mail company received notice that it was banned from Google’s AdSense program last week, which sent shares spiraling downwards. Now, the company said it is cooperating with Google with the goal of resolving any remaining compliance issues.

IncrediMail’s quarterly and yearly results are likely to be adversely affected by this Google AdSense downtime, but a reinstated contract is definitely good news after such a short time. In a previous article, we speculated that the company would either reinstate AdSense or find a similar advertising program very quickly as it is a very liquid marketplace. We suggested that the stock price would likely rebound once they had re-established this agreement as it did today.

Ultimately, shares dropped over 45% after this problem began and have only recovered around 20%. The earnings for next quarter may be hurt, but it is unlikely that the damage would justify a 25% reduction in the company’s market capitalization – especially since we know it is a short-term, one-time issue. While the argument to buy is not as strong now as it was before this announcement, it still appears as if IncrediMail is a stock that was made cheaper by a relatively non-material event. Combined, these factors may warrant a second look at this company!

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Zale Corporation (NYSE: ZLC) board members and management may be in for a shake up after former SEC chairman and activist investor Richard Breeden upped his stake in the company and announced his intent to make some changes at the jeweler. Many shareholders are hoping that the activist can help unlock value in a stock that has dropped from a high of $30 per share earlier this year to its current $14 per share.

“We believe that there are major opportunities for Zale to strengthen its profitability and its market value. We are excited to join with the board and the Zale management team in pursuing those opportunities with vigor and immediacy,” said Mr. Breeden in a statement.

Richard Breeden, who now owns more than 18% of Zale, also announced that he would take two seats on the board with a third one going towards an independent director. The move comes as Zale shares continue to fall after an ill-fated decision to convert Zale stores to upscale locations, which alienated many of its customers and suppliers.

Zale recently announced that it has approved several changes, including the sale of its high-end Baily Banks & Biddle stores and the closure of 60 underperforming stores in the next 90 days. Other believes that the company may be considering strategic alternatives such as a sale but it could be a far-fetched conclusion. Now, with Breeden’s involvement, these rumors have begun to surface yet again.

Overall, it remains unclear what Breeden’s plans for the company are, but we do know that he is an experienced activist investor that is more than capable of unlocking value in his investments. With an open management and board, along with two board seats, it will be interesting to see what actions he takes. Combined, these factors make ZLC a stock worth watching!

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