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January 19, 2006

Motorola Earnings Preview

Motorola (MOT) reports after the close on January 19th. I outlined my general thoughts on MOT a few days ago. I am expecting a solid quarter and decent 1Q06 guidance. I think those two things and some recent positive comments about 2006 handset market growth will allow MOT shares to push to new highs in 1Q06 with the shares having the potential to reach the upper $20s. Northlake clients have been long MOT for over a year and very well rewarded. If the scenario I just outlined occurs I'll be looking to exit the MOT position in the $26-28 range....

Consensus for 4Q05 calls for EPS of 34 cents on $10.5 billion in revenues. Handset units are projected at abut 45 million, up form 38.7 million in 3Q05. Handset margins should expand again to over 11%, up 20-30 basis points sequentially. The ASP on handsets should be flattish around the $145 level from last quarter. AN inline quarter will bring full year 2005 EPS to $1.12.

As usual with MOT, guidance is at least as important as the quarter to be reported. Current consensus for 1Q06 is 28 cents for EPS on revenue of $9.33 billion. Handset units are set for a normal seasonal sequential decline of about 10%. EPS for 2006 is currently projected at $1.29.

The big questions for MOT shares are (1) how strong will the global handset be in 2006, (2) will MOT be able to maintain share, and (3) will margins continue to expand. Regarding the handset market, most observers were surprised by growth in 2005 that exceeded 20%. Presently estimates for growth in 2006 seem to be moving up from earlier forecasts of 10% growth. In 2005, MOT gained market share due to the massive success of the RAZR and successful entry into lower priced phones for emerging markets. The RAZR is getting old by normal industry life cycle standards and some analysts have recently noted that the PEBL and SLVR don’t seem to have much buzz yet. Consequently, there appears to be some concern that MOT may not be able to sustain its recent market share gains. MOT's margins in handsets still trail NOK by a significant amount. MOT has stated they believe that margins can rise to 13-15% and rival NOK. Recently, margins have been trending up and are set to cross 11%. Analysts are looking for a 2006 margin of approaching 12%. One thorn in the forecast is the loss of QCOM royalties which are extremely high margin revenues that flow through the handset division.

The press release and conference call should provide insight into each of these questions. To reiterate, my position is that MOT has been a good ride and I don’t want to risk overstaying my welcome. I think some of the concerns about 2006 could prove valid and expectations for MOT are much higher than a year ago when nobody respected the turnaround. The risk-reward tradeoff is thus not as attractive, especially considering the historical volatility in handset market growth and market shares.

Posted by Steve Birenberg at January 19, 2006 12:59 PM in MOT