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April 18, 2006

Motorola First Quarter Earnings Preview

Motorola (MOT) reports after the close tonight. The stock has rebounded strongly in recent weeks as analysts have grown more optimistic about global handset growth in 2006 and MOT's growth in the first quarter. Concerns remain about second half growth as comparisons are tough, the network division continues to struggle, and loss of high margin royalty income continues. A new fear is that the company may use its incredible financial strength to acquire the lagging Siemens telecom business. While this acquistion might fix MOT's own lagging network infrastructure business.

A more complete preview of MOT's earnings report is in the "Continue Reading" section. Just click the link below. I should note that this preview was written by my fellow Street Insight contributor, Jeff Bagley. JEff is covering the MOT call this evening for StreetInsight. Jeff and I see eye to eye on a lot of stocks and use a similar analytical approach. Thanks to Jeff for allowing reproduction of his work on Northlake's website.

I still think MOT deserves to trade in the upper $20s. Conseqeuntly, the shares continue to held througout the Northlake client base. My patience is wearing a bit waiting for the market to agree with me. I respect the market so the results and reaction to the quarter will make a difference to my plans for MOT shares.

Most investors now expect Motorola (MOT) to post good numbers when it reports first-quarter earnings Tuesday afternoon, and that's become a problem. The bar is now rather high, and it will take a fairly magnificent showing to move the stock appreciably higher in the short term.

Positive data from Motorola's supply chain, as well as positive comments from both MOT management and competitors, have raised expectations for the handset division, which is now the primary driver of the company's sales and earnings growth. A positive catalyst for the stock could be better-than-expected strength in margins - a distinct possibility - or earnings guidance that is better than the cautionary, under-promise and over-deliver comments to which all have grown accustomed. Of course, a sales and/or earnings shortfall would probably spell certain trouble for the stock, but I don't believe that's likely.

According to data compiled by Thomson First Call, analysts are looking for Motorola to earn $0.29 a share on sales of $9.56 billion, for year-over-year growth of 32% and 24% respectively. Management guidance, issued in February is for earnings per share of $0.27-$0.29 on sales of $9.3 billion to $9.5 billion. Analyst estimates have been drifting higher most recently, based mostly on strength in handsets.

Thin Is In

Although Motorola's operational turnaround under Ed Zander has been most impressive, the primary driver of the company's recent stellar performance has been its lineup of thin phones. The company's RAZR phone has been an unmitigated success, and the SLVR sales have been robust as well. Analysts are looking for RAZR and SLVR shipments of about 13 million and 2.7 million units, respectively, for the first quarter. Total unit shipments for the Motorola portfolio are expected to be between 43 million and 44 million. This estimate has risen substantially recently given good news from the supply chain, from the industry, and from management comments.

Of course in this industry you innovate or die, so Motorola cannot rest on its laurels. In fact, one of the primary concerns among investors is the company's ability to replace the RAZR - already in its unheard of seventh quarter of strong sales - with the next new thing. The company is counting on the SLVR to pick up the slack, but the competition is close behind, especially with Samsung's strategy of imitating MOT's thin phone product offerings.

Low End Phones Key to the Future?

While the company has had a great deal of success on the high end, there is tremendous opportunity on the low end, especially given the emergence of gigantic cell phone markets such as China and India. In fact, there's been quite the buzz on Wall Street on this subject recently. Investors will be looking for progress on sell through for these regions, and to get a better handle on average selling prices (ASPs) and margins.

Low-end phones have much lower ASPs, of course, so the focus will be on just how much progress management has made - or could make - on its supply chain initiatives. Competing on the low end can only be successful longer term if component pricing is attractive. Given Wall Street's general aversion to falling ASPs, investors will be especially interested in how profitable Motorola can be with its strategy of taking share on the low end of the market.

Margins, Margins, Margins

Analysts are expecting significant margin growth both this year and next as the company progresses toward reaching its long-term goal of 13% to 15% operating margins. Accordingly, the company's margin performance during a strong handset market will be a key metric for investors. It looks as if most analysts are forecasting an operating margin of about 11.7%-11.8% for the quarter, going up to about 13.0% by the end of 2007.

Again, any substantial surprise - either way - could be a catalyst for the shares. Bear Stearns recently upgraded the stock based on their expectation for better-than-expected margin growth.

Other Businesses Remain a Concern

Although it looks as if Motorola's handset business is on fire, investors remain concerned about the company's network infrastructure business, as well as the small connected home (set-top cable boxes) division. Representing 21% and 17% of the company's 2005 sales and operating profits respectively, the infrastructure division is the biggest concern as network operators migrate from legacy systems.

The lack of new 3G WCDMA contract wins has been mentioned by several analysts recently, and there has been speculation about the Nextel iDEN business since that company's merger with Sprint. Motorola holds a monopoly on that business, and that will likely change as at least some of those users are migrated to Sprint's CDMA 2000.

Posted by Steve Birenberg at April 18, 2006 10:16 AM in MOT