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April 07, 2005

Catching Up With Motorola

Cross-posted from StreetInsight.com....

Motorola (MOT) reports on April 20th. Yesterday, the shares had their best day in a long time, rising over 2% in a strong tape for technology stocks. After peaking at over $18 in December, the shares have fallen pretty steadily to recent lows at $14.70. I've been long the stock since last summer and quite frustrated as earnings results have generally been quite good. My thesis has been that improved execution under the new management team would be rewarded with a higher valuation. I thought numbers could be a bit low as well which would have added some leverage to the return.

Smith Barney was out with a good note yesterday capturing the issues that have troubled the stock. The same note included an estimate increase for the soon to be reported quarter to above consensus that was likely the source of yesterday's upside in the stock. The issues for the stock have been (1) rumblings from suppliers that MOT is pushing out orders, (2) lack of margin expansion in handsets against strong volumes and ASPs, (3) fears about the near-term impact of the company's rollout of sub-$40 GSM handsets targeted at emerging markets, (4) MOT's poor win percentage in wireless network infrastructure buildouts, (5) fears abut the impact of consolidation among wireless carriers – specific to MOT, fears about its relationship with the new Sprint-Nextel, and (6) general concerns about handset market growth, particularly in larger industrialized markets, and the corresponding competitive concerns.

Now that I write out that list, it is no surprise that the shares have done poorly. It is quite a list to overcome in an industry that has a lot of skeptics given its increasingly commodity nature.

Approaching the quarterly report, I think the expectations built into the shares are quite low. If Smith Barney is correct that strong unit volumes and ASPs due to sales of RAZR and iDEN phones result in a positive surprise, the stock is a good setup to trade higher. I plan to discipline myself to either sell the shares or buy more after analyzing the quarterly report. I still have this suspicion that the stock will move up sharply and Ed Zander will be the cover boy on the business magazines later this year for successfully reinvigorating Motorola. However, I am beginning to think that investors won’t pay a high multiple for wireless suppliers and the shares will languish despite a successful turnaround. Things should be clearer in less than two weeks.

Posted by Steve Birenberg at April 7, 2005 04:43 PM in MOT