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July 18, 2006

Motorola Earnings Preview

Motorola (MOT) reports after the close on Wednesday, July 19th.

Despite weak stock price performance and negative datapoints from the supply chain, analysts expect MOT to post a good 2Q. In fact, recent analyst commentary has had an improving tone as it relates to the quarter. This is probably because other handset vendors have reported indicating that overall industry shipments were strong and MOT probably gained market share.

MOT shares have consistently traded down following its quarterly earnings since the company’s turnaround became evident after its explosive 1Q04 earnings report. This has been true despite the fact the company has not really missed estimates since 2003. The only times that MOT shares have rallied off earnings is when the company and beat the number and raised guidance. In this quarter, I think the bar is a little lower due to lousy action in the stock over the past few months. However, MOT bulls, which include me, really need a beat and raise scenario.

The beat side seems pretty plausible given the likely strength in the key handset division. The raise may be more difficult as concerns abound about a deceleration in the RAZR, sell-through on the Q, and the general health of the mobile devices business. Additionally, MOT is not expected to ship new models until the 4Q even though new model announcement have been coming steadily and more could be ahead at the company’s annual analyst meeting next week.

MOT shares look cheap at 14.6 times 2006 estimated EPS. When adjusting for over $4 in net cash on the balance sheet with more on the way, the stock looks even cheaper. However, MOT shares need momentum on handsets and margins and a better outlook for its network business. Overall, I see the bar as low enough to beat for the 2Q and the rest of 2006, so I remain long going into the quarter despite what feels like a higher risk profile.

For 2Q, consensus is calling for EPS of 31 cents on revenues of $10.27 billion....

The closely watched handset division is expected to ship 48 million units and show margins just north of 11%. I have seen at least one estimate for 50 million handsets. ASPs for handsets are projected in the upper $130s, down from $145 last quarter. RAZRs contain to ship in quantity while the Q had initial shipments in the quarter and MOT continues to attack the emerging markets with low cost handsets. Low-end phones reduce ASP and margin so that is something to watch. Margins also are feeling pressure from infrastructure build to reach emerging markets and a loss of royalty revenues. Also of note will be sell-through of the Q and comments on future shipment levels.

It looks like most analysts have adjusted for the divestiture of the automotive business but that could still cause some confusion when analyzing the reported numbers. Getting rid of this business will help future growth and margin performance.

MOT's Networks division has been a real disaster in the eyes of analysts with 5 straight quarters of sequential declines in revenue. Loss of iDen revenue as Spring Nextel upgrades its network remains an issue.

Connected Home should continue to perform well as MOT is delivering lots of set tops to the cable industry which is enjoying high growth in subscriber units for telephony, digital cable, and high speed internet.

Posted by Steve Birenberg at July 18, 2006 01:07 PM in MOT