There won’t be much fresh news when Motorola (MOT) reports its 4Q06 tomorrow morning. The preannouncement the first week of January has already delivered the bad news. All eyes will be on guidance and commentary about the outlook.
MOT shares have collapsed from $26 in mid-October to recent trading levels near $18. The decline was well underway before the announcement as fears about falling ASPs due to mix issues, the maturing RAZR, and lack of traction for new products was causing the multiple to compress. It turns out those fears were accurate and the issues were even worse than expected.
Recapping 4Q06, the miss came entirely in the handset division. MOT is now expected adjusted EPS of around 25 cents vs. prior estimates in the upper 30 cent range. The problem is margins and mix not unit sales. In fact, handset sales are well ahead of expectations, a reflection of a strong global market and continued share gains for MOT. Unfortunately, the share gains are coming in low-priced phones for emerging markets while at the same time to sustain market share in more mature markets, MOT has had to price the RAZR aggressively. MOT was hoping that new products like the KRZR and the Q would sell well and hold ASPs up but the new products have not met expectations.
This setup means that guidance is critical. What investors want to know is when will margins rebound. The answer will be complicated by product mix and competitive issues, so I am not optimistic that the takeaway from the guidance discussion will be positive. As a result, I would not be long on a trading or investment basis ahead of the call. I think MOT’s margin and competitive issues will remain for at least a few more quarters. Furthermore, MOT has never been a stock that Wall Street trusted. It appeared that CEO Ed Zander had overcome the prejudice but the big 4Q miss has the stock back in the penalty box. And this isn’t a two minor for hooking. Whether it is 5 minutes for fighting, a 10 minute misconduct, or a game misconduct is the big question.