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March 21, 2006

A Colleague's Perspective on Motorola

A fellow contributor to StreetInsight.com recently wrote a good piece on Motorola (MOT). Jeff Bagley and I share a similar view of stock market investments and own several of the same stocks for our clients. Since you are probalby getting bored with my commentary, please click "Continue Reading" to read Jeff's insightful thoughts on MOT.

Motorola (MOT) stock has rebounded nicely since I mentioned it last week in the context of its recent RAZR product defect problems. As expected, the problems associated with the RAZR were limited in scope, and resolved very quickly. Hats off to CEO Ed Zander, who has rebuilt Motorola into a company capable of spotting such problems early and taking necessary steps to greatly limit the damage. I'd hate to think what would have happened only a couple of years ago.

Current Strength Stemming From Improving Prospects in China

Although part of the stock's recent strength is attributable to investor relief that the RAZR problems didn't morph into something more serious, much of the current strength stems from the company's improving prospects in the all-important China market. Ed Zander is over there right now, and in a press release announcing three new investments in the country, Motorola claimed to be the largest foreign investor in China's electronics industry, with $3.6 billion invested since 1987.

Expect Benefit From China Mobile's Increased Guidance

More importantly, however, is the news that China Mobile has significantly increased its guidance for capital spending for both this year and next. Motorola should be a prime beneficiary, and this should go a long way in allaying investor fears about a possible slowdown in MOT's wireless infrastructure business.

Citigroup analyst Daryl Armstrong, who covers Motorola, today highlighted China Mobile's increased capex plans. Translating into dollars, he writes that China Mobile plans to spend roughly $10.4 billion this year, up from previous guidance of $6.7 billion. For 2007, guidance goes up to $9.7 billion from previous plans of $5.7 billion. Although Armstrong notes that this is slated for 2G networks, I believe the money is earmarked for upgrading existing 2.5G networks. (According to Bloomberg, China hasn't set a timetable for granting licenses for 3G networks.)

Armstrong notes that Motorola has a 13% market share into China Mobile, implying that MOT's take from China Mobile could increase by 50% and 70% in 2006 and 2007, respectively.

Many Believe RAZR Success Will Be a Tough Act to Follow

As I've repeatedly noted, Motorola is a stock that everyone loves to hate, despite a rather spectacular turnaround orchestrated by Ed Zander. Given the pessimism, it's little wonder that Motorola stock is still relatively inexpensive. Consider that the company has about $10.5 billion in net cash on its books, which equates to roughly 18.4% of the company's equity market capitalization, or more than $4 per share.

Even without adjusting the earnings multiple for the cash, despite the recent run, the stock still trades at about 17 times earnings. And those are very high quality earnings, with gobs of cash flow backing them up. The major wildcard with Motorola stock appears to be its continued success in the highly competitive handset market, with many believing that the RAZR success will be a tough act to follow.

Company Continues to Make All the Right Moves

Those concerns are valid, but from where I sit Motorola continues to make all the right moves, and should build on its momentum in the coming quarters. The current valuation already reflects, in my view, the bulk of investors' growth concerns.

Posted by Steve Birenberg at March 21, 2006 11:05 AM in MOT