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April 18, 2007

Motorola 1Q07 Earnings Offer Little Hope For A Near-Term Turnaround

The message from the 1Q07 results from Motorola (MOT) could be that the worst is over. However, you can also draw the conclusion that earnings power in 2008 remains uncertain. Put these together and the shares should not react too much to the latest news.

EPS of 2 cents matched consensus and were at the high end of management guidance. Revenues came in a little better than expected $9.43 billion vs. a consensus estimate of $9.29 billion. Handset units were 45.7 million, indicating that MOT lost about 5 points of market share during thee quarter. ASPs were flat. Europe and most emerging markets were weak while North America was OK and Latin America was solid. Mobile Device segment sales fell by 15% and the division produced an adjusted operating loss of $231 million....

Connected Home Solutions performed very well in the quarter with double digit revenue gains and a huge increase in margins, up more than double to 13.4%. Government and Enterprise also appears to have had a decent quarter. Analysts did not ask any question about these divisions on the conference call and I think it is fair to say that neither of these divisions will have a meaningful impact on the stock price in the near-term.

The Balance Sheet deteriorated in the quarter as expected. Net Cash has fallen from $4.50 per share to less than $2.00 per share as MOT has made several acquisitions and bought back over $2 billion in stock. Inventory days and Days Sales Outstanding both deteriorated. The conference call had several questions about inventories. Management admits that inventories are still too high and the next quarter will see further drawdown.

Continued inventory adjustments and weak product positioning on a global basis led management to guide 2Q results below current street estimates. Essentially, management is looking for a repeat of 1Q performance with EPS of 2-3 cents and revenues of $9.4 billion. The handset division is expected to slightly reduce its operating loss. For 2007, the forecast is for a "gradual improvement" in sales and operating margin as the year passes. Management is standing by its prior forecast that the handset division will be profitable for the full year.

The 2Q guidance and "gradual improvement" will result in a fairly significant cut to the current consensus of 49 cents for 2007. However, this probably doesn’t matter as MOT is trading as a value stock based on the fact that the massive sales base of over $40 billion offers significant earnings power if managed correctly. The possible end of the inventory drawdown, stabilizing ASPs, and management commentary indicating the focus is on profitability not growth give the bulls and value players some hope.

I think that will be enough to leave MOT shares near recent levels but I don’t think it is nearly enough to drive a meaningful move upward. Earnings power of $1.00 or more for 2008 must be more evident before MOT becomes an interesting buy idea. I don’t see that happening until at least 4Q07. Short-term traders should use any strength off the 1Q07 report to sell or short. Long-term investors should step aside for another three to six months but keep your spreadsheets up to date.

Posted by Steve Birenberg at April 18, 2007 09:26 AM in MOT