MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Microsoft v Nokia: Great expectations chapter 1

C. HUYGENS - Monday, September 16, 2013
Few things are as illustrative as an exercise of comparing and contrasting. Huygens this week is presenting three pairs of corporate reputation data for the sole purpose of the benefits described. First up are Microsoft (MSFT) and Nokia (NOK). The latter, having taken action motivated by a burning platform, appears -- as Huygens' friend, a fireman, likes to say -- to have saved another foundation. Claiming that foundation, intellectual property actually, is Microsoft whose patent department used to be headed by Marshall Phelps, formerly of IBM, who brought over IBM's tradition of amassing patents. But that's all inside baseball. Let's look at what the stakeholders expect, as reflected in the Steel City Re reputational value metrics.



Looking first at the vital signs is evidence that Microsoft's current reputational value volatility, what Consensiv, the reputation controls consultancy, likes to term the Consensus Trend, has reached parity with Nokia. What was formerly an indication of relatively high certainty of the appropriate reputational value at the 29th percentile from a pool of 85 companies for Microsoft, and average certainty at the 56th percentile from of pool of 74 for Nokia, is now in the 60th+ percentile for both. In absolute numbers, Nokia's current RVM (RVM is a non-financial measure of reputational value) volatility is around 10%, which puts it comfortably in the range of "expected big equity changes." The other metrics generally show that the same bottle of fine scotch could be used toast success at Nokia and drown sorrows at Microsoft, for the leading indicators are stable for the former, and negative for the latter. The bottom line, Microsoft's current reputation rank has fallen. It has lost significant amount of Reputation Premium; the opposite for Nokia. QED.

Nokia: Stained shorts

C. HUYGENS - Tuesday, September 03, 2013
Surprise, surprise! Shorting securities is a high risk gamble. Never mind that a key motivator is a deep-seated belief that a company is doomed. Dead is dead. But equity investors have a wonderful way to resurrect companies in advance of a sale. Nokia (NOK), pronounced dead by Huygens long ago, returns to help Microsoft (MSFT) address its own problems. The street says Microsoft is buying hardware, intellectual property, and a former Microsoft executive who may replace Ballmer.

Over the past five years, Nokia has lost 80% of its value falling from $21 to less than $4 on Friday. Today it is up 40% in early morning trading. Nokia shareholders are celebrating. Nokia shorts are turning to NetFlix (NFLX) shorts for advice. Microsoft investors are less enthused. The stock is down 4.75% in early morning trading.

That equity investors were surprised should not be surprising, looking at Steel City Re's reputational value metrics. Stakeholders as a group were seeing upside, but no there was no expectation of a major event. Stakeholders collectively were progressively giving Nokia some additional reputational premium that was pushing its equity returns to above average levels relative to the 72 peers of the telecommunications equipment sector. The expectations were for continued increase in the reputation premium (CRR). Also, while forecast stability, a vital sign, was only in the 14th percentile, the consensus trend (RVM Volatility) was below average suggesting a uniformity of expectations. These data all suggest that shorting Nokia at this time would have been a bad idea, but they also indicate that there was no real expectation of a major upside event.

Nokia: On life support

C. HUYGENS - Wednesday, June 20, 2012
Fourteen weeks ago, the Steel City Re reputation metrics suggested Nokia's prospects were bleak. Nokia is not getting any better. Reputation vital signs recorded late last week are consistent with a company on life support. Think of those movie scenes where the heart monitor switches from a series of pings to a monotonous tone, and the  display switches from peaks and valleys to a flat line.

All current vital sign metrics are below the 10th percentile. The historic reputational volatility metric is in the 92nd percentile. Diagnosis: recent violent reputational trajectory with evolving terminal failure of life support systems. (Note that the reputational metrics anticipated the market price failure by a few weeks.).

Nokia: Trending to where?

C. HUYGENS - Thursday, April 12, 2012
In "Why RIM Lost Its Crew, Its Groove" (6 April), Richard S. Levick explains that the failure over at Research in Motion was due, in part, to their failure to engage their customers and understand their needs. Richard, who will be participating Friday 13 April in the Society's Mission Intangible Monthly Briefing on protecting reputation, knows his stuff. He contrasts RIM with Apple and Google, who may be no better at technology than RIM, but who are very good at understanding how their customers want to experience technology. Social media get a nod as being powerful enablers of engagement. We concur.

There's more to the story. Nokia, the European contender, doesn't even get an honorable mention.  Huygens is not expert at social media, but Huygens can measure reputation, and reputation in the technology sector is very sensitive to how stakeholder's perceive a firm for its innovation prowess. Having a big tent and ample data, we thought we would revisit Nokia after 14 months and see how they have evolved from a quantitative perspective. The trend is not promising if you are an equity investor.



Notwithstanding a few spikes above the median over the past year, and cutting to the chase, the bottom color chart shows in blue that Nokia's reputation ranking has sunk to a new low - the 13th percentile - among the 76 firms in the Telecommunications Equipment peer group. Its return on equity has followed a similarly dismal curve, in yellow, under performing the median of its peer group by 20%.

The upper charts provide more detail. Relative to its peer group, as reported in the chart labeled Vital Signs, Nokia's reputation has been all year long  -- up to last week -- exceptionally volatile ranking in the high 90th percentiles. The parity of current vs. historical volatility, and how that looks relative to Nokia's peers, is shown at top right.

While the trending is negative, it is not a stable trend. The Vital Signs report that reputational stability is in the 11th percentile while the middle charts show that the return on equity at the 26th percentile. This is high for the reputation ranking, all other things being equal. This could be viewed as either very good news, or bad news, depending on whether Nokia's price is felt to be ahead or behind its reputational metrics. So either a surprise rise, or another disappointing fall are just around the corner.

Hint: The RepuStars Variety Composite Equity Index calculated by Dow Jones Indexes is based on the thesis that although reputational value is usually fairly embedded in stock price, there are are arbitrage opportunities that can be exposed with reputational metrics. If we had to bet based on the above, we'd short NOK and predict the prices will drop from the 26th percentile to one closer to the rank's 13th percentile.

Nokia vs. Apple: Yearning for a bite

C. HUYGENS - Thursday, February 17, 2011
On Monday 14 February, Barron’s released its list of the world’s most respected companies. Apple (NASDAQ:APPL) tops the list at #1 yet again. And lest your curiosity be left hanging, finishing off the top 5 are Amazon (NASDAQ:AMZN), Berkshire Hathaway (NYSE:BRK), IBM (NYSE:IBM) and McDonald’s (NYSE:MCD).

And then there is Nokia (NYSE:NOK), the world’s biggest telephone handset-maker. Quotes the Economist, “We are standing on a burning [oil] platform,” Nokia’s CEO, Stephen Elop, wrote in a memo to all 132,000 employees. If Nokia did not want to be consumed by the flames, it had no choice but to plunge into the “icy waters” below. In plainer words, the company had to innovate -- quickly.

The value of Apple’s reputation for innovation, earned by actually being innovative, is that while the most respected company in the world only commands 4% of the telephone handset market, it commands 50% of the profits. That's pricing power, a benefit of a superior reputation, in the extreme.

Turning to the reputation metrics, Apple’s popular standing is reflected in its stable top ranking in the Steel City Re Corporate Reputation Index. Over the trailing twelve months, it has made the jump from the 97th percentile to the 100th percentile among the 51 companies in the Electronic Data Processing Equipment sector, and over the past six months, it hasn’t budged from that spot. Its corresponding trailing twelve month return on equity is 58.63% greater than the median of its peer group, its EWMA volatility is 1%, its trailing twelve week reputation velocity is 0.0, and its trailing twelve week reputation vector is undefined.

Its peer group shows a U-shaped drop and recovery in reputation standing relative to the market as a whole, and the intra-sector volatility is at the upper end of average. Significantly, the intangible asset fraction of the group has been progressively rising these past 12 months.

Nokia should wish for such metrics. Over the trailing twelve months, it has dropped from the 36th percentile to the 19th percentile among the 30 companies in the Diversified Electronics sector. Its corresponding trailing twelve month return on equity is 52.22% below than the median of its peer group, its EWMA volatility is 2%, its trailing twelve week reputation velocity is -10%, and its trailing twelve week reputation vector is -.8% which is a material level.

Its peer group shows a slight rise is reputation standing relative to the market as a whole, and the intra-sector volatility is at the low end of average. Last, its intangible asset fraction has dropped from 86% to 78% of market capitalization while the median of its peer group now stands at 88% of market cap.

Mr. Elop believes that one advantage Apple has over Nokia that he believes he can overcome is its access to the innovative genius that is resident in Silicon Valley. Stay tuned, as Finland comes to California.

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