The iPhone Triumphs Over All

GOOD MORNING. Stocks in Asia closed higher today; U.S. futures are pointing to a higher open.

The cell phone industry is gearing up for the holiday season with a fleet of new handsets, and they all have one goal in mind: to steal some thunder from Apple’s (AAPL) iPhone. Even if some of the new devices catch on with consumers, though, Apple may still have an edge in one critical arena: profitability.

For the first time since it launched its iPhone two years ago, Apple has became the most profitable maker of handsets in the industry, according to a new report from industry research firm Strategy Analytics. Apple doesn’t break out profits per division, but Strategy Analytics estimates Apple's operating profit for its iPhone unit came in at $1.6 billion quarter in the third quarter, beating Nokia (NOK) for the first time. Nokia still sold the most handsets around the world, upwards of 108 million phones, generating sales of 6.9 billion euros ($10.36 billion) and profits of $1.1 billion. And Apple isn’t close to that volume, selling 7.4 million phones in the quarter, with revenues of $4.5 billion. But Apple has leaped ahead of its rivals thanks to high wholesale prices, tight cost controls and strong volume growth, according to Strategy Analytics. Nokia now trails Apple in market share in the U.S., and Nokia's profit margin for its handset division has been shrinking in 2009.

To some extent, though, it’s not really a fair fight. Nokia competes around the world with a wide range of phones, from low-end handsets used primarily for making calls (who would guess) to high-end, multifunction smartphones. Apple makes just one phone product and profit margins in the industry are higher as you move up the price ladder, says analyst Lee Simpson of Jefferies & Co., in London. Nokia has been shifting manufacturing to lower cost countries like China and Korea, he points out, and Apple still doesn’t have Nokia’s global scale, competing across the price spectrum with a broad lineup of devices. “It’s fashionable to love Apple,” he says, “but it’s difficult to duplicate Nokia’s reach, and it remains to be seen whether Apple can do this.”

Apple is also facing an increasingly tough smartphone market, squaring off against new touch screen devices from Research in Motion (RIMM), Motorola (MOT) and Palm (PALM). Several of the new models are also equipped with Google’s (GOOG) Android operating system, which has been winning positive reviews. Nokia, for its part, has rushed out what it hopes is an iPhone killer, the N-900, based on a new Linux operating system. But it’s far too early to say if it will be a hit. “The high end is getting crowded,” says Simpson, “and it’s a difficult play for Nokia.”

IN OTHER NEWS:

What’s brewing with Green Mountain Coffee Roasters (GMCR)? Another hearty fiscal fourth quarter from the look of it. When the specialty coffee company serves up results after the market closes today, analysts are expecting earnings of 33 cents a share, up from 19 cents a share in the year-ago period, on revenue of $216.62 million. That represents an increase of 60.7% from the previous year.

Green Mountain has been reporting strong growth for years, but it owes the current spurt to its 2006 acquisition of Keurig, a producer of single-cup coffee makers. That deal positioned Green Mountain to take advantage of an flourishing market. Last week, for example, Peet’s Coffee and Tea’s (PEET) announced that it will acquire Diedrich Coffee (DDRX), another roaster and wholesaler. Analysts say that development should further boost the Keurig brand in the Western U.S., where Peet’s is thriving. (Diedrich reported last week that its sales of Keurig K-Cups grew 66% in the quarter ending September 16, compared to the same quarter a year ago.)

While Green Mountain is likely to continue expanding for some time, ultimately it will hit a ceiling based on the limited number of people interested in single-cup systems, says Michael Krestell, an analyst with M Partners, Inc. “Too much implied market share down the road is priced into the stock at this time,” Krestell says. The company has performed well through the recession, but could see somewhat slower growth if consumers start feeling better about treating themselves to more coffee outside the home at Starbucks (SBUX) or elsewhere, he adds.

Starbucks’s new Via instant coffee could also become a competitor to the Keurig brand, adds Greg Schroeder, an analyst at Jesup & Lamont. “I don’t think the market really looks at Starbucks Via as a potential competitor, but [CEO] Howard Schultz’s comments [on Thursday’s earnings call] suggest that they’re paying attention to it” and the coffee giant intends to compete for the home market, Schroeder says.